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A Project of The Annenberg Public Policy Center

Alaska’s Pension Fight

The Alaska Senate candidates exaggerate the impact of a $500 million settlement that Republican Dan Sullivan reached as state attorney general in 2010.

The Alaska Retirement Management Board sued its actuarial firm 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.

Sullivan and his Democratic opponent, Sen. Mark Begich, have put a misleading spin on the settlement in recent TV ads:

  • Sullivan’s ad features a teacher who says her pension “took a big hit” in the “financial crisis” and credits Sullivan for “forcing a Wall Street firm to pay for their malpractice.” The two events are unrelated. The lawsuit accused the firm of an actuarial error in 2002 — six years before the financial crisis occurred in 2008.
  • The teacher also boasts that Sullivan stood up for “every Alaska teacher” by forcing the firm to return “almost half a billion dollars into the retirement fund for Alaskans.” But the Teachers’ Retirement System received only $44 million of the $500 million.
  • A Begich ad says Sullivan’s settlement is “putting the permanent fund at risk,” suggesting every resident who receives a dividend from the Alaska Permanent Fund may have to pay for Sullivan’s actions. The state this year added $3 billion to its pension system without tapping into the permanent fund. Also, there are other factors — not just the actuarial errors — that caused the pension shortfall.

The Alaska Senate race — one of several highly competitive elections that could decide control of the Senate — has focused of late on Sullivan’s record as attorney general. Earlier this month, we wrote about a Begich TV ad that claimed Sullivan let a sex offender now accused of murder get off with a “light” sentence. The ad, which was pulled because of complaints by the victims’ families, exaggerated Sullivan’s role in mistakes that were made that resulted in a shorter sentence than could have been handed down.

Standing up for Teachers?

This time it’s Sullivan who made an issue of his experience as attorney general when he aired a TV ad called “Alaska’s Teachers.” The ad, which aired from Sept. 4 to Sept. 13, features Anchorage teacher Leslie Moore, who leaves the false impression that the Teachers’ Retirement System was victimized by a “Wall Street firm” during the recent financial crisis.

“After the financial crisis, my pension took a big hit. It was a difficult time for all of Alaska’s teachers,” Moore says. “But Attorney General Dan Sullivan fought back, forcing a Wall Street firm to pay for their malpractice – returning almost half a billion dollars into the retirement fund for Alaskans. Dan Sullivan stood up for me and every Alaska teacher.”

The fact is that the lawsuit had nothing to do with the recent financial crisis, and the teachers’ fund got far less from the $500 million settlement than suggested by the ad.

Here are the facts: The Alaska Retirement Management Board filed a negligence suit in December 2007 against Mercer — a subsidiary of Marsh & McLennan Companies — for $1.8 billion in damages. (The damages amount was later increased to $2.8 billion.) Mercer was the state’s longtime actuarial firm for both the Teachers’ Retirement System and the Public Employees Retirement System and, as such, was responsible for determining assets and liabilities and calculating the state obligation to adequately fund the pension accounts.

The lawsuit, as the New York Times explained in a 2009 story, accused Mercer of making errors in the 2002 report, understating the pension fund liabilities by as much as $1 billion.

New York Times, Dec. 19, 2009: The error was compounded in 2003 because Mercer continued to use an artificially low number for pre-retirement-aged beneficiaries. If the firm had corrected the earlier mistake, an actuary said in a deposition, “It would have been difficult to explain.”

Because of the errors and cover-up, the lawsuit said, Mercer underreported by more than $2.8 billion the contributions required to fund the plans.

So, the alleged mistakes were made in 2002 and 2003 — at least five years before the financial crisis caused steep stock market losses that are still fresh in voters’ minds. Stock prices fell 50 percent from October 2007 to March 2009, according to the Federal Reserve Bank of Atlanta.

Sullivan, who was nominated attorney general in June 2009, settled the suit on June 11, 2010, for $500 million, as the ad states, about a month before the trial was supposed to start. Despite the impression left by the ad, the teachers’ fund got a relatively small percentage of the $500 million.

After court costs and legal fees, the pension funds received $403 million. Most of that money — $359 million — went to the Public Employees Retirement System. The teachers’ fund received only $44 million.

Response Ads

The NEA Advocacy Fund, which is the super PAC of the National Education Association, and the Begich campaign responded to Sullivan’s ad with ads of their own.

The NEA fund went up with an ad on Sept. 10 that expressed the opinion that Sullivan “sold Alaska’s teachers out.” The ad, which is still on the air, says, “Instead of recovering what could have been nearly $3 billion, he cut a deal for just pennies on the dollar.” The text on the screen shows “20 cents on the dollar.”

Whether the deal was good or bad for the state’s retirement funds is a matter of opinion, so we won’t take a position on that. However, the Begich campaign goes too far in its ad, which also accuses Sullivan of cutting a bad deal.

The 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.”

We should first note that “ripped off” implies that Mercer stole money from the fund. That was not the case.

But, more to the point, 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. Why? The permanent fund, which is funded with lease agreements and royalties received from production of oil, gas and other minerals, will pay a dividend of $1,844 this year to every Alaska resident who lived in the state all of last year. It would be politically unpopular to divert money from the permanent fund and reduce future dividends.

Yes, it’s legally possible that the permanent fund can be used this way, and some have suggested that it may need to happen in the future. The Begich campaign points to some speculative statements — including one from Republican Rep. Bill Stoltze, who in April said the state would have no choice but to use the permanent fund if it was the only available funding, since the state is constitutionally obligated to meet its pension payments. But such speculation has existed for years.

At a legislative hearing in 2005, Larry Semmens, the then-finance director for the city of Kenai, suggested using the permanent fund to reduce the state’s unfunded pension liabilities. The meeting minutes paraphrased him as saying, “There will be little public support to use the permanent fund to pay down the debt but it may make sense in this case.” It didn’t happen.

In 1999, then-Gov. Tony Knowles proposed using the permanent fund to close a budget gap. Although he didn’t need it, Knowles sought voter approval in a nonbinding referendum, because, as the Associated Press wrote, “touching the permanent fund is widely considered political suicide.” A whopping 83 percent voted against using the permanent fund to balance the budget. A post-election poll showed that half of the voters “would never agree to use the Permanent Fund money for government,” according to a 2012 book titled “Alaska’s Permanent Fund Dividend: Examining its Suitability as a Model.”

Achee told us it is still considered “the third rail of Alaska politics” to use the fund for anything other than dividends or expenses related to the fund’s management.

Although the fund ended fiscal year 2014 with a balance of $51.2 billion, Achee said only $6.2 billion of that was available to state legislators after paying the 2014 dividend and accounting for the effect of inflation on the fund’s principal (see “end assigned balance” for fiscal year 2014). But, she said, “it could be potentially career-ending for an elected official to vote to spend from the earnings of the permanent fund.”

The 2012 book on the permanent fund noted that the state spent $210 million from the APF in fiscal year 2010 to cover expenses related to the fund that were once covered by the general budget — such as Alaska Permanent Fund Corporation’s operating costs, contract investment managers and investment management fees. The fund is also used to help pay for inmates’ health care “based on the number of inmates ineligible to receive a Permanent Fund dividend,” according to a House Finance Committee budget document. Inmates are not eligible for a dividend.

If the $210 million had been paid with general funds, instead of permanent funds, the individual dividend for 2010 “would have increased by $316 (by 25 percent), to $1,597,” the book said.

Even if the fund is tapped for pension costs in the future, Sullivan’s settlement wouldn’t be the sole or even primary reason for such a “raid,” as the Begich campaign calls it.

The ad cites an Alaska Dispatch News article from April 18, 2014, as evidence that Sullivan’s settlement is “putting the permanent fund at risk.” That’s the article that included a quote from Stoltze, the GOP state legislator, speculating about the permanent fund. At the time, the state’s unfunded pension liability was about $12 billion — far more than the $2.3 billion difference between the lawsuit and the settlement — and the Legislature was considering Parnell’s $3 billion cash infusion plan. The article blamed the $12 billion in unfunded liabilities on legislative inaction — not on the $500 million settlement. “Alaska leaders have not dealt with the state’s growing retirement debts, making minimum payments in years of oil-fueled surplus so they could have more money available for more popular programs,” the article said.

There was also the matter of the stock market collapse in 2008 — six years after the actuarial errors were made. In a segment last year on Parnell’s $3 billion pension rescue plan, Alaska Public Radio noted that “the retirement burden really grew in 2008, when the state lost a fifth of the money it had saved because of the recession.”

In announcing the settlement, Sullivan also said the unfunded liabilities were not caused just by the funds’ actuarial firm. “The unfunded liabilities were caused by stock market declines, significant increases in health care costs and, as alleged by the ARM Board, Mercer’s negligence,” the June 11, 2010, press release said.

We take no position on Sullivan’s decision to settle the case before it went to trial. There is no way to know if the state could have done better if the case went to trial, or whether Sullivan could have negotiated a better deal.

But the facts show the ads by both candidates exaggerate the impact of the $500 million settlement on the lives of teachers and all Alaskans.

— Eugene Kiely