House Finance hears presentation on PERS, TERS funding and unfunded liability

Juneau — At a public meeting of the Alaska House Finance Committee on April 2, 2025, the Division of Retirement and Benefits and the committee’s actuarial consultant gave lawmakers a detailed briefing on the state’s public retirement systems — the Public Employees’ Retirement System (PERS) and the Teachers’ Retirement System (TERS) — and on the drivers of their unfunded liabilities.

The presentations, led by Kathy Lee, director of the Division of Retirement and Benefits, and David Kershner, an actuary with Gallagher Consultants, laid out how benefit tiers, medical eligibility rules, actuarial assumptions and funding policy together determine contribution rates and long‑term projections. “The actuarial rate is what you’d need to be able to support the plan,” Kershner told the committee, noting the division’s most recent projections and the funding decisions the ARM board has adopted.

Why it matters: State budget projections and employer contribution requirements for school districts and municipalities depend on the pension systems’ funding status. The committee heard that changes in assumed investment returns, demographic assumptions, and ARM board amortization rules materially change the state’s required contributions and projected liabilities.

Kershner summarized the liability projections the ARM board adopted in September 2024 and the position of the systems in the most recent valuations. He said the ARM board’s September projection showed roughly $70.9 billion in projected actuarial accrued liability for PERS and just under $39 billion for TERS on a long‑run projection basis, and that the actuarial assumed rate of return used for valuation and projections is 7.25 percent. In the 2024 valuations Kershner reviewed during the hearing, the PERS pension unfunded liability on the actuarial (smoothed) basis was reported as about $5.5 billion and the TERS pension unfunded liability about $1.8 billion; funded ratios were roughly in the high‑60s for PERS and high‑70s for TERS.

Committee members asked detailed questions about benefit differences by tier and how medical and post‑retirement adjustments work. Kathy Lee walked through the tiers, including medical eligibility and the health reimbursement arrangement (HRA) available to members in defined contribution tiers. She explained the PERS and TERS tier differences for normal and early retirement ages, system‑paid medical eligibility rules, and which tiers are eligible for automatic versus ad‑hoc post‑retirement pension adjustments.

Lawmakers drilled into several topics the division described:

- Tier differences and medical eligibility: Lee explained that vesting in DB tiers is generally five years, and that medical eligibility varies by tier (for example, later eligibility under Tier 3 and different HRA rules for the defined contribution/DCR tier). She said the retiree health plan is primary until Medicare eligibility and becomes supplemental at Medicare age.

- Social Security/SBS interactions and teachers: Multiple representatives asked whether teachers could join Social Security (or the state’s Supplemental Benefits System, SBS). Lee said teachers voted historically to remain in TERS rather than join Social Security when the option was available; a school district or group of employers can hold a referendum to opt into Social Security, and the department would assist with that process through the Social Security regional representative.

- Funding methodology and ARM board choices: Kershner described statute and policy changes put into place in 2014 and updated in 2018, including the switch from level‑dollar to level‑percent‑of‑pay amortization, a closed 25‑year reset of amortization, a two‑year roll‑forward (contribution lag), and the move to a smoothed asset value with five‑year recognition. He explained the ARM board’s layered amortization policy, adopted to reduce contribution volatility by amortizing new experience gains or losses over new 25‑year layers instead of forcing large payments into the final years of an existing amortization schedule.

- Recent experience and drivers of change: Kershner pointed to large market gains in 2021 followed by significant losses in 2022, commissions of large one‑time state contributions (a multibillion infusion in FY2015 that materially reduced liabilities), and periodic assumption changes (mortality tables, investment return assumptions) as the main drivers behind year‑to‑year changes in the unfunded liability. He emphasized that lowering the assumed investment return increases measured liabilities — a 100‑basis‑point decline in assumed return can increase measured liability by roughly 12 percent.

Committee members also asked for additional details the division did not have at the hearing, including HRA outflow statistics and more granular employer‑by‑tier cost splits; Lee said the division would provide follow‑up information.

Kershner concluded by noting the ARM board will adopt final FY27 contribution amounts in September 2025 and that final FY2024 asset numbers would be adopted in June 2025. The committee took the presentations as informational and scheduled follow‑up actuarial documents for a future meeting.

Ending: The committee paused the pension briefing to allow another scheduled presentation from the Alaska Municipal League; the division and Gallagher Consultants provided follow‑up contact information and said final valuation and ARM board adoption documents would be available in the coming months.