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ARM Board urges action on pension costs

Delaying will be expensive, dangerous, pension trustees say

Posted: December 4, 2011 - 1:08am

The Alaska Retirement Management Board is recommending the state not delay action on the state’s unfunded pension liabilities, but is leaving the various options up to Gov. Sean Parnell and the Legislature to decide between.

The board of trustees manages the state’s $19 billion in retirement savings, mostly for the Public Employees Retirement System and Teacher Retirement System. Its latest estimates show an unfunded liability of $11 billion.

That’s the difference between what it expects to have available with which to pay pension and health care costs and what it will need.

Among the options the board looked at for making up the gap were state cash infusions, but it chose not to recommend a specific amount.

It did, however, say that some options should be taken off the table, including leaving the plans inadequately funded for the long term or overly extending the years over which the liability would be paid off.

Extending the time over which the unfunded liability would be paid off from the current 25 years to as long as 40 years could reduce yearly costs substantially, but was rejected by the ARM Board.

“The board does not recommend any funding scenario which fails to amortize the unfunded liability over a reasonable time frame,” the board decided unanimously, but left the specifics up to the governor and Legislature.

The board also acknowledged the impact addressing the retirement debt issue could have on the state’s general fund, and competing demands for state resources.

While the state currently has about the same amount in savings — not including the Alaska Permanent Fund — to pay off the unfunded liability, using that money presents challenges, the board was told. Most of that money is in the Constitutional Budget Reserve, which takes a supermajority vote of the Legislature to access.

Further, Parnell has proposed major cuts to the state’s oil taxes, which could put additional demands on that money.

The state has an obligation to its retirees, but meeting that obligation will mean other expenditures that would benefit the whole state won’t be able to be made, said Becky Hultberg, commissioner of the Department of Administration.

“A large portion of the budget is being reserved for a small population,” she said.

The board, including Hultberg — one of two members of Parnell’s administration who are members — was unanimous in its urging of immediate action, however.

One issue it addressed was changing how each year’s payments are calculated.

The amount that must be paid into the retirement trust fund every year is now calculated on what’s known as a “level rate of pay” method.

That means less cost now when pay is lower, but more cost in future years after annual raises.

The board said switching to a “level dollar” method would be more painful now, but would strengthen the system.

John Boucher of Parnell’s Office of Management and Budget, said that would cost more now but reduce cost over the long haul.

“If you go to a level dollar you are paying more upfront to get a benefit in the long run,” he told the board.

Among those watching the ARM Board’s actions closely, along with current and future retirees, are the state’s 220 employers covered by the systems. Those are mostly local governments and school districts.

Among the options on the table are upping the employers’ costs, amounts that have so far been limited by state law but which could be changed. That may be one of the only options for additional pension money other than the state’s general fund, the ARM Board was told.

Earlier this year, Parnell made a first-ever appearance by a governor before the board to highlight the need for a solution.

While he asked the board for its help he also asked them to not tie policymakers’ hands by limiting their options.

The ARM Board’s resolution appears to do that anyway, to an extent. The board said the option of extending the amortization period over which the debt would be paid off was unacceptable, as was leaving them inadequately funded.

Board members said that would mask the problem by reducing annual costs, but would not solve the unfunded liability problem.

Two members of his administration supported the board’s resolution, so it appears Parnell was not considering those easier but much more costly options anyway.

Serving on the board along with Hultberg is Commissioner Bryan Butcher of the Department of Revenue.

The board considered delaying its recommendations until its next meeting, in February, but said it didn’t want to delay legislative review of its recommendations.

The resolution and accompanying scenario spreadsheets that have yet to be completed will be provided to the Alaska Legislature before it convenes Jan. 17, 2012.

• Contact reporter Pat Forgey at 523-2250 or at patrick.forgey@juneauempire.com.

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