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Retirement bill, meant to offset costs, will actually increase unfunded liability, actuaries say

Pat Forgey

JUNEAU -- A state retirement bill signed and praised by Gov. Sean Parnell Monday will increase the state's unfunded liability and increase costs years into the future, actuaries told the Alaska Retirement Management Board this week.

"The first year, you're not even paying interest on the unfunded liability, and the unfunded liability grows," said David Slishinsky, an actuary with Buck Consulting, the board's main actuarial consultant.  

That's because legislators changed the way required annual payments for the unfunded liability are calculated, reducing their costs for several years, and shifting much of the cost 20 to 30 years down the road. The liability now won't be fully paid off until 2039, Slishinsky said.

"It will eventually catch up," he said. "We're seeing an increase in unfunded liability for eight years, assuming all other assumptions are realized. After that it'll start coming down."

But Monday, Parnell described the bill completely differently.

"It takes the burden off our kids and grandkids to pay this debt that is owed. It is a debt we will make good on," he said during a bill-signing ceremony before state employees in the atrium of the State Office Building in Juneau.

The bill Parnell signed, House Bill 385, calls for $3 billion to be transferred from the state's Constitutional Budget Reserve to the trust funds for the Public Employees' Retirement System and the Teachers' Retirement System. That was sought by the retirement board.

Such a cash infusion into the trust funds would reduce the unfunded liability, which last year was $12 billion, along with the annual cost of paying down that already incurred debt.

But Parnell and legislators also wanted to reduce the state's annual cost of paying down that debt for the next few years, which Parnell called "Alaska's biggest budget cost driver."

What the bill and separate "legislative intent" language in the $3 billion appropriation did was make numerous calculation changes to reduce those annual payments, dropping them from about $1 billion a year to $384 million, the board was told.

Parnell spokesperson Sharon Leighow defended the bill Friday, saying that legislators would not be able to afford to make the payments otherwise.

"The escalating payments would also squeeze dollars from every other program and state service," she said.

House Bill 385 passed unanimously, but it was drafted in secrecy late in the session, and few legislators in debate or interviews later appeared to fully understand or be able to describe what it did.

That might have resulted in "unintended consequences," board member Martin Pihl and others said.

"The liability is going to grow for eight years," he said. "I don't think that's right, and I don't think the Legislature understood that."

Alaska Department of Law attorneys and board legal counsel Rob Johnson have been analyzing those provisions along with the actuaries for the last two months, and they reported on them to the retirement board during its meetings this week.

Many of the dramatic changes that raised concerns on the board came from changes made in the legislative session's final days, Johnson said.

He reminded them of the old adage about "there are two things one should not watch being made: sausage and legislation."

The Department of Law said it concluded the the "legislative intent" language did not carry the force of law, but cautioned that it had been included in the $3 billion appropriation and been passed by the three-fourths of legislators required in order to withdraw money from the Constitutional Budget Reserve fund.

While the intent language wasn't enforceable, the department lawyers said agencies "may comply as a matter of comity."

Among the changes called for in the intent language is an elimination of "asset smoothing," in which big changes in value of the retirement trust funds, such as the 2009 stock market decline and subsequent bounce back, are averaged into unfunded liability calculations over five years.

Two actuaries at the board meeting said they did not recommend removing asset smoothing for their other clients.

Doing so creates more volatility in the amount of money the state would have to pay to unfunded liability each year, especially in the later years.

"By the time you get down to 10 years, it'll be a roller coaster ride," Slishinsky said.

Agreeing with Slishinsky about the value of asset smoothing was Leslie Thompson with the actuarial firm GRS. Following multibillion-dollar actuarial errors a decade ago, the board contracts with a second actuarial consultant to review the work of Buck, its primary actuary.

Board members discussed whether they should comply with the intent language when they set the retirement contribution rates later this year, with some arguing that they also have a fiduciary responsibility to the trust funds as well as a responsibility to comply with legislative  intent.

"I think we have to look at what's best for the system," Phil said.

Board member Sam Trivette agreed, and suggested meeting with legislators to see if they really understood and meant to do all the things they did.

But the Department of Revenue's Gary Bader cautioned against not complying with the intent language when they set next year's rates, even if it was non-binding.

"I don't think saying 'they probably didn't understand' will sit well with people," he said.

Slishinsky has been asked to have data on various scenarios prepared for the board's September meeting.

Reach Pat Forgey at pat@alaskadispatch.com.