An investment boom is shrinking Alaska’s multibillion-dollar state pension gap

The investment boom that fueled the Alaska Permanent Fund to record highs is also narrowing a multibillion-dollar gap in the state’s pension funds for public employees.

As of June 30, the gap between assets and liabilities in the state’s two biggest pension systems was about $4.9 billion, and some parts of the Public Employees Retirement System and Teachers Retirement System are actually overfunded, according to figures published by state advisers.

Seven years ago, the gap was about $12 billion, the result of bad advice from an actuarial firm that led to years of underfunding by state officials.

The state has been gradually filling that gap with additional payments each year, but on Monday, the Alaska Retirement Management Board voted to significantly reduce those deposits.

The change was driven by improved investment returns and a policy shift. The board voted to temporarily stop making extra payments to the trusts that pay retired teachers’ and public employees’ medical expenses.

Added to previously planned rate reductions, the move will cut about $88.8 million in state spending. It must be approved by Gov. Mike Dunleavy and the Alaska Legislature before becoming final.

The members of the board entered Monday’s meeting expecting to make some reductions. They set contribution amounts annually, and when the funds’ investments perform well, contribution rates drop.

But board member Allen Hippler went a step further, proposing to eliminate state contributions to retirees’ health care.

The Public Employee Retirement System and Teachers Retirement System are each made of two separate trusts, one for health care and the other for pension payments. The trusts are separate and can’t share money without legislative action.

In the case of the public employee system, the health care trust is at 118.5% of its needed level. The larger pension trust is at 66.9% of what it should have. The two trusts for the teachers’ system have a similar divide.

The board accepted Hippler’s proposals to temporarily halt health care contributions and as a result, the state is now expected to pay a lower total contribution rate than at any other point in the past decade.

The change is good for only one year, and the board could resume medical payments later.

Ahead of Monday’s meeting, Revenue Commissioner Lucinda Mahoney proposed a new long-term plan that would result in lower annual payments for about three years.

On Sept. 22, Mahoney told board members that Gov. Mike Dunleavy’s administration has required each state agency to identify savings through reductions in department budgets, and the administration is concerned about the prospect of overfunding the state’s retirement systems.

Mahoney sits on the retirement board, but her proposal encountered stiff resistance from members of the public and from the board’s advisers, who said it made the retirement trusts more vulnerable to the volatility of investment markets.

After hearing public and invited testimony on Monday, Mahoney withdrew her proposal, and board members said it could be revived next year.

Nils Andreassen, director of the Alaska Municipal League, was one of the people who testified against Mahoney’s proposal and said that the board’s final action makes more sense.

“I think where they landed is valid, and they need to further consider this scenario and do their due diligence around it,” he said.