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Despite $3 billion boost, Alaska pension cost will hit municipalities hard

  • Author: Pat Forgey
  • Updated: September 28, 2016
  • Published June 15, 2014

JUNEAU -- A move to shore up Alaska's troubled public retirement systems with $3 billion from state savings is coming under fire from some members of the board set up to ensure that an earlier costly pension debacle wasn't repeated.

This year's action by the Legislature comes with strings attached that could lead to problems down the road, they say.

"Any way you look at it, we've pushed these costs onto our kids and grandkids," said Kris Erchinger of Seward, a member of the Alaska Retirement Management Board.

In the just-concluded legislative session, lawmakers extended the period over which Alaska's $12 billion unfunded pension liability would be paid off while shifting some costs to Alaska cities and boroughs.

Extending the amortization period, the time over which that debt would be paid, is comparable to the difference between a 15-year and a 30-year mortgage, Erchinger said. Essentially, the longer period allows lower monthly payments, but at a much greater total cost.

"It's a better deal for the folks who have to balance the budget today because they have to pay less today," she said.

"But projections of decline in oil production -- oil revenues -- does not bode well for our ability to pay those costs in the future," Erchinger said.

While retirement board member Martin Pihl of Ketchikan joined Erchinger and others in praising the $3 billion, he doesn't like the Legislature's cost shift.

"I do have deep regret over what I feel is the unnecessary extension of the amortization period, bringing huge, huge, additional cost -- like more than $2.5 billion to the people across Alaska -- and forcing even greater numbers into state budgets down the line," Pihl said.

Municipalities pay more

That increased cost for municipalities stems from a 2005 deal in which state and local government officials negotiated a way to pay off the unfunded liability. It called for municipalities to pay an extra 22 percent of their payroll toward the back debt until it is paid off. Extending the amortization term by nine or 10 years increases the cities' share while reducing the state's share of that cost.

"I ran the numbers for Seward, and just to extend the amortization period was $2,000 for every man, woman and child living in Seward," said Erchinger, that city's finance director as well as an ARM Board member.

The Alaska Retirement Management Board was created in 2005 after lawmakers were stunned by the growth of the state's unfunded liability. That's the difference between what the state needs to pay benefits and what it expects to have available.

After Alaska's actuarial consultant was found to have provided false numbers to the state, the ARM Board was told to hire a second actuary to review the work of the first actuary to make sure the state based its decisions on good numbers.

But despite drastic changes to the state's public employee retirement system, replacing the traditional defined-benefit pension with a 401(k)-style defined-contribution plan, the unfunded liability continued to grow. Since then it's nearly doubled.

Although the new ARM board repeatedly called attention to that growth, neither the governor nor legislators proposed any changes.

Finally, the retirement board took one of the few steps it had the power to take, changing how the amortization period to pay off that liability was calculated, with the new method putting much more money into the trust funds earlier.

The switch from the previous level-percent-of-pay method to the level-dollar method would have meant a cost to the state of about $1 billion this year.

'Constitution is pretty unambiguous'

Instead, the Legislature passed House Bill 385, which called for the $3 billion deposit into the retirement trust funds. But it also takes away from the board the power to decide which amortization method to use, requiring it to go back to level percent of pay, said Gayle Harbo, an ARM Board member from Fairbanks.

"One thing I get a kick out of is when they tell us we have to use actuaries all over the place to make our recommendations, and then when we listen to the warnings the actuaries gave us, the Legislature just changes it all," Harbo said. "It increased the amount of money that the municipalities are going to have to pay."

That change was a disappointment to the Retired Public Employees of Alaska organization, which has watched the process closely.

"Our preference would have been to go with the ARM Board's decision to use the level-dollar option, providing those higher payments in the early years when we still have money in the bank," said Jay Dulany, the group's president.

He said the group has been assured by legislators that the state will continue to meet its obligations, but whether that happens is "anybody's guess."

State funds eventually will have to be used to pay pension obligations, even if the only state money available is the Alaska Permanent Fund, state officials say.

"Our constitution is pretty unambiguous," said Rep. Bill Stoltze, R-Chugiak, before the bill passed. "Retirement benefits are a contractual obligation. It couldn't be any more clear."

Board member Sam Trivette of Juneau said the level-percent-of-pay method adopted by the Legislature will result in less money going into the retirement trust funds initially, weakening them and driving up costs in the long run.

"That's why we supported level-dollar," he said. "A shorter amortization period saves everybody billions of dollars."

The Legislature, in its final days, or hours, made another change -- one that was a blow to municipalities.

The Senate Finance Committee was working on House Bill 385, action being closely followed by the Alaska Municipal League.

Days earlier, the group had fended off proposals to raise the amount of payroll cities had to contribute from 22 percent to 24 percent, something municipal league Executive Director Kathie Wasserman said would be devastating.

Her group also fended off a proposal, adopted by the House Finance Committee, to shift to a radical pay-as-you-go plan.

But the radical plan was rejected by the full House of Representatives, and the Senate Finance Committee was looking at a plan that resembled Gov. Sean Parnell's original plan, one that was endorsed by the municipal league.

Wasserman was called to the Senate Finance Committee table and asked to testify on the bill. She told the committee the group endorsed House Bill 385, but as soon as she sat back down in the audience, Wasserman was concerned.

"Wow, they could do anything to us now, and I'm on the record saying 'Yeah! Way to go!'" Wasserman said later. And then, almost immediately, the legislators did what she feared.

They rewrote the bill Wasserman had just gone out on a limb to endorse publicly, shifting almost half of the extra money from the Public Employees' Retirement system to the Teachers' Retirement System.

The $3 billion Parnell had originally sought included $1.9 billion for PERS and $1.1 billion for TRS. The rewrite made it $1 billion for PERS and $2 billion for TRS.

Now, not only will the amortization period be extended, the annual costs to municipalities will be larger than they'd hoped for.

State government pays a larger share of the Teachers' Retirement System unfunded liability, so shifting the bulk of the $3 billion there helps balance state budgets at the expense of municipal budgets, she said.

"I understand why they did that, because they're paying so much more on TRS," Wasserman said.

No time for debate

House Bill 385 was then rushed to the floors of both houses of the Legislature without public hearings and with almost no time for public input on the changes. It passed unanimously in both the House and Senate.

"It almost had the appearance at the end that everyone was holding hands and we all got what we wanted, when in fact it is a drastic shift and it was one that will benefit the state (government) and have a huge cost to municipalities," Erchinger said.

The combined changes will now cost the taxpayers in Seward many thousands each, she said. Other cities and boroughs presumably face similar costs, she said.

Parnell has yet to sign House Bill 385, but he has already signed budget bills to which it is linked.

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