JUNEAU -- A legislative budget scheme that may have been used to make budget numbers look better in the past threatens this year to drive up the state budget by $45 million.
Now, the Alaska Retirement Management Board says it will resist legislative direction to take an action that some members said was "not actuarially sound" and come up with its own budget numbers.
Board member Sheldon Fisher, Gov. Bill Walker's commissioner of the Department of Administration, called the board's action "prudent" and questioned whether legislators really knew what they were doing when they attempted to change how retirement contributions are calculated.
"It's not something the Legislature considered in a very deep or substantial way," Fisher said during a board meeting Thursday in Fairbanks.
Board members who both supported and opposed challenging the Legislature worried that their action might anger key lawmakers, but noted that their decision would save money in a budget that is already expected to be billions of dollars in the red.
The conflict started in 2014 when the Legislature agreed to support then-Gov. Sean Parnell's request for $3 billion to shore up underfunded pension trust funds. But legislators added a number of provisions of their own, largely aimed at reducing annual payments to pay down that retirement liability.
One of those changes was to eliminate "asset smoothing," the process by which trust fund investment returns are averaged over a five-year period to prevent dramatic swings in contribution rates.
The Legislature instead wanted the ARM Board to use real market values each year, not the averaged or smoothed numbers, to calculate annual retirement payments.
That immediately caused the board's actuaries to raise concerns. One of those was David Slishinsky of Buck Consultants, who warned the state would face a "roller coaster ride" in future years as numbers would go up or down.
The ARM Board was created by the Legislature and given the task of determining the annual retirement contributions after the state's Public Employees' and Teachers' retirement systems were discovered to have billions less in assets than they'd need to pay for pension and health care costs for state, municipal and school district employees.
But in 2014, when the board was trying to see those trust funds adequately funded, the Legislature told the board how it should calculate those contribution numbers, including telling the board to do away with smoothing.
That reduced cost to the state then, but this year it increased costs substantially. Board member Kris Erchinger, who chairs its actuarial committee, said that actuaries ran the numbers and determined that with smoothing the cost for the retirement payment in next year's budget would be $215,866,535, while without smoothing it would be $261,038,698.
Research by the state's actuaries determined that such smoothing was an actuarial best practice, and she said it was especially important for Alaska right now.
"Given the state's budget challenges, minimizing volatility to the extent possible is a good thing," Erchinger said.
Complicating the issue was not just what the Legislature did, but just how it did it.
Instead of passing a bill and putting the ban on smoothing in statute, which would tie the ARM Board's hands, it included the ban as "intent" language in a budget bill. With no legislative track record or public hearings, board members said it was difficult to determine what the Legislature was trying to accomplish with the smoothing ban.
Board member Martin Pihl of Ketchikan, a retired pulp mill executive, said the intent was clear to him.
"I believe the legislators knew what they were doing," he said.
But board member Tom Brice, a union leader, called it a "philosophical question" of whether the retirement board was bound by intent language.
"If the Legislature wanted to remove smoothing altogether they would have established that in statute rather than using intent," he said.
Brice is a former state representative from Fairbanks.
Board member Randy Hoffbeck, who also serves as the state's revenue commissioner, warned the board's action might anger legislators, but joined in supporting it.
"I think it's critical to recognize the fact we're going to get some pushback," he said. "The legislative intent, I think, is pretty clear."
The Alaska Department of Law has advised state agencies that intent language is not binding, but said that they might want to comply as a "matter of comity."