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Legislature's plan to pay down retirement debt sets state up for big costs down the road

Pat Forgey

JUNEAU -- A retirement funding package that legislators rushed to pass in the last two days of the legislation session adds $3 billion to retirement trust funds, but shifts billions in costs from the state to municipalities, as well as rolling back one of the reforms intended to prevent future retirement funding crises.

Given final approval by the Alaska House of Representatives Sunday, the bill that debuted in the Alaska Senate Saturday calls for moving $3 billion from state savings accounts to the state's underfunded public employee retirement accounts, as had been sought by Gov. Sean Parnell, but then dramatically slows future payments and extends the repayment schedule for years.

There were no public hearings on the final bill.

An actuarial analysis of the Senate's plan, made public Saturday morning just hours before the final vote on the Senate floor, shows costs to the state increasing by $2.7 billion dollars.

Sen. Anna Fairclough, R-Anchorage, said she argued unsuccessfully for a shorter debt payoff period to save the state money. The plan adopted by the Senate will extend the repayment period by nine years, she said.

"That nine years has consequences," she said.

Rep. Mike Hawker, R-Anchorage, said that change "back loads" the costs, and that by not paying today, it will mean higher costs for future legislators to deal with.

"What we don't pay today we'll be paying in increased payments in the latter part of the 25-year cycle," he said.

But despite his concerns, he said the plan that the Legislature has adopted is actuarially sound.

But the $2.7 billion in extra costs to the state treasury are only a portion of the additional costs that result from the change, according to the actuarial analysis by Buck Consultants. Other employers, including cities, boroughs and school districts that have employees covered by the Public Employees' Retirement System will see their costs go up by $2.5 billion due to the lengthened payoff period, according to the report.

That change means that legislators will have more savings available to spend now, but that the state and municipalities will be expected to pay higher retirement payments in future years, at a time when legislative and Parnell administration financial projections show the state's savings being exhausted and state revenues falling dramatically.

To accomplish the delay, and to give current leaders more money to spend, the Legislature is also removing a key power it had earlier given to the Alaska Retirement Management Board in an effort to prevent future unfunded pension liabilities from arising.

The ARM Board currently gets to choose the state's method of determining annual payments, both the amortization period and the actuarial method. The board said it preferred a shorter amortization period, but it also recently made a controversial change from a former method called "level percent of pay" to a the current method called "level dollar."

In essence, that level dollar method would cost more up front, but save big bucks down the road.

In a press release touting the Senate's action on House Bill 385 Saturday, Senate Finance co-chair Pete Kelly, R-Fairbanks, said the $3 billion cash infusion "allowed" the state to make smaller payments. Actually, what the bill does is force the ARM Board to switch back to the level-percent-of-pay method, and reduce payments into the retirement trust funds.  

It was a divided ARM Board that originally adopted the level-dollar method, with Gov. Sean Parnell's two commissioners who sit on the board both voting against the change.

The ARM Board had warned of under-funding of the retirement plans for years, but the unfunded liability kept growing as governors and legislators made only the minimum required payments. It was when the board forced the issue by adopting the level-dollar methodology that action began to pay down the debt. According the the Office of Management and Budget, that change would have boosted annual retirement payments to more than $1 billion a year, starting this year.

But with the passage of House Bill 385, said Senate Finance Committee aide James Armstrong, the ARM Board will be told it "must" use level-percent-of-pay method to calculate annual payments.

The Legislature held no public hearings on its new bill before holding its floor vote, but did solicit the views of Parnell's Department of Revenue Commissioner Angela Rodell.

"We do not have any concerns with either of the changes the committee has proposed," Rodell told the Senate Finance Committee Saturday.

As commissioner, Rodell sits on the ARM Board. Her predecessor voted against the change to level dollar, saying the state needed flexibility to be able to spend its savings on other priorities. The public members of the ARM Board prevailed, however, and adopted the faster payment method over the Parnell administration's objections.

Following the Senate's 20-0 vote Saturday to approve House Bill 385, Kelly issued a press release saying the "Legislature pays down retirement debt."

That statement was echoed on the House floor Sunday as the bill was approved there.

Rep. Cathy Munoz, R-Juneau, carried the bill on the House floor. "This will improve the health of the retirement trust funds," she said.

The bill puts more money into the retirement accounts initially, but then less over time than the current system. That strikes a fair balance, she said, because legislators have other spending priorities as well.

"It leaves extra cash available in the next decade to meet other state demands," Munoz said.

The House vote to agree to the Senate changes was 40-0.

Contact Pat Forgey at pat(at)alaskadispatch.com.