Opinions

Senate Finance didn't check finances of pension plans before proposing change

Any plan to shift billions of dollars of pension obligations from the state to local governments and school districts ought to be preceded by careful analysis and collaboration.

That didn't happen with the cost-shifting bills released March 28 by the two leaders of the Senate Finance Committee, Sens. Anna MacKinnon and Pete Kelly. They proposed a long-term plan to transfer $3 billion in costs over the next 23 years.

One of their bills proposed that local governments would pay more of the debt in the Public Employees Retirement System for the so-called "defined benefit" pension system that has been closed to new employees for a decade. The increase would "save" the state $1.1 billion by 2039, transferring the expense to local governments.

MacKinnon and Kelly introduced the bills a week before getting a financial analysis on the bills from Buck Consultants, the company hired by the state to provide expert advice. In the sponsor statement on the bill, which is no longer on the state website, MacKinnon and Kelly said their bill was a "conservative approach to balancing the state's current fiscal reality" with a commitment to helping municipal governments.

But the PERS rates proposed in their bill are higher than the consulting company believes will be needed. Given this contradiction, MacKinnon and Kelly said Monday they won't push SB 209.

Had the Senate Finance Committee done more research, its members would could have learned from a Feb. 17 draft report by the state consultant that the numbers didn't justify the MacKinnon-Kelly cost-shifting PERS plan.

On Monday, trying to put a better spin on the decision to stop the PERS bill, MacKinnon said, "We were notified from our finance team that there is good news." She said the numbers from the consultant "look much better than they did prior to the introduction of those particular bills for conversation."

ADVERTISEMENT

The handling of the PERS bill does not inspire confidence that the more expensive teachers' pension bill, which would shift $2.1 billion in costs away from the state through 2039, makes sense for Alaska.

The TRS bill, SB 207, would raise the percentage of payroll paid by districts into the pension fund starting this July, with annual increases through 2019. This would reduce state funding for education. MacKinnon and Kelly said they intend to cover the costs for the first five years by ending a scholarship program, a connection that is more of an illusion than reality as state dollars are not dedicated in that fashion.

The Senate leaders say local governments created the costs for the pension debt and should pay more. Echoing that attitude, House Speaker Mike Chenault said, "The state's the administrator to the plan, but the municipalities and the school districts, it's their responsibility to pay that."

But let's step back and acknowledge the reasons why we have billions in unfunded pension debts.

State mismanagement and a long track record of poor decisions by past governors and legislators are near the top of the list. For its part, the state blamed Mercer Consulting for mistakes and bad advice, filing what The New York Times called a "bombshell of a lawsuit." While Rep. Mike Hawker said at the time this was like "suing the weatherman" for a bad forecast, the state had a case. The lawsuit alleged $2.8 billion in damages and the state settled for $500 million.

That didn't erase the billions of dollars of debt, but it showed the flaw in thinking that municipal governments and school districts did this to themselves.

For decades, the state did not separately account for the amounts paid by individual employers. The state extended generous benefits without raising contribution rates, approved discretionary post-retirement increases, relied on inaccurate assumptions and exhibited poor judgment. A three-year bear market on Wall Street and a steep climb in health care costs turned the plans upside down, revealing an enormous debt.

A settlement in 2008 with local governments and school districts established a cost-sharing plan that set percentages for local governments and school districts, with the rest to be paid by the state. Karen Rehfeld, state budget director in 2008, said at the time the rates would be permanent, which would provide the "fiscal predictability" needed by local governments.

The settlement represented an acknowledgement by the state of its responsibility. It is too late to deny that responsibility now.

Kelly said "we were told when we were discussing it in years past that it was a deal somehow and a deal was a deal. But the environment in which that deal was made changed dramatically in the stock market crash in 2009."

He said the unfunded liability was "somewhere in the neighborhood of $4 billion" in 2008, but when the stock market fell, "we went from a $4 billion unfunded liability to a $15 billion unfunded liability."

But Kelly would only have to look to a May 8, 2007, statement of his brother, former Rep. Mike Kelly, to find a different take on this matter.

Mike Kelly said the Legislature intended to keep the percentages level: "I just want to make it clear I sat in this chair when the number was $4.7 billion. It has now climbed to $10 billion; I don't think anybody argues with that if we brought it current. And there are those who say it may climb as high as $15 billion," Mike Kelly said nine years ago.

Mike Kelly served on a joint legislative education funding task force that issued a report on Sept. 1, 2007, and said the bill "effectively relieves school districts from financial responsibility for unfunded past service costs in excess of levels specified in that statute." Five of the 10 legislators who served on that task force remain in office.

The most recent reports estimate the unfunded liability for the two systems at $6.1 billion as of last July, down from $12.4 billion in 2013. The debt was $7.5 billion in 2008.

A $3 billion deposit by the Legislature in 2014 lowered the debt and the size of current payments, but it also extended the payback period by nine years. This had the effect of shifting billions in old debts onto Alaskans who are still in elementary school.

With state finances in turmoil because of the oil price collapse and the decline of oil flow in the trans-Alaska oil pipeline, it makes perfect sense to look at whether the state needs to force local governments to raise taxes by shifting costs.

ADVERTISEMENT

But it has to be a collaborative process, not one in which Senate leaders try to force a change near the end of the session by short-circuiting the committee process and refusing to consider statewide tax increases to cover statewide responsibilities.

Dermot Cole is a Fairbanks resident with a 40-year career in Alaska journalism. One of his daughters is a deputy press secretary to Gov. Bill Walker. The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)alaskadispatch.com.

Dermot Cole

Former ADN columnist Dermot Cole is a longtime reporter, editor and author.

ADVERTISEMENT