House Republicans presented their proposal for increasing education funding Tuesday, and with it came the first glimpse into legislative decision-makers’ thoughts on fixing the state’s growing unfunded liability problem.
Within Republican Gov. Sean Parnell’s omnibus education bill, HB278, legislators proposed adopting a “pay-as-you-go” plan for addressing the retirement benefit question — one of the biggest issues facing the Legislature this session.
The proposal defines the payment plan in statute to ensure payments will be made on schedule, but it also dramatically increases the amount of time the state will be paying into the system.
The plan — crafted by Legislative Finance Division director David Teal — is the Legislature’s alternative to a plan proposed by Parnell in December.
“One says coast on earnings, and one says contributions are more reliable,” Teal said, comparing his plan to the governor’s.
If no change is adopted by lawmakers this year, the state payments to pay for the unfunded liability and benefits owed through the Public Employees’ Retirement System and the Teachers’ Retirement System would soon eclipse $1 billion annually and continue to rise as the state eyes several megaprojects in the near future.
Both plans propose injecting the retirement system trust fund with funding up-front — Parnell’s suggestion is about $3 billion for TRS and PERS combined, and Teal’s suggestion is just under that.
The alternative plan aims to curb a problem of diminishing deposits into the trust fund by requiring the state to pay for a 20 percent increase in employer contributions.
Going forward, the state would be making payments between $150 million and $160 million annually toward TRS, Teal said, adding that increases in future projections are solely the result of inflation.
There was concern raised during the hearing that the legislation only said the state would reimburse school districts — meaning the increased rate would cost the University of Alaska about $7 million. Committee co-chair Rep. Bill Stoltze, R-Wasilla, said after the meeting that the university’s concerns would be addressed in a fiscal note on the bill.
The governor’s plan, on the other hand, calls for larger payments in the short-term — $343 million annually to TRS — so the fund would be large enough to pay off the benefits owed within 20 years.
Tuesday’s meeting was the first this session where representatives from the administration were asked questions about Parnell’s proposed fix.
Department of Revenue commissioner Angela Rodell told the committee that adopting the alternative proposal could be interpreted by credit-raters as the state backing away from it’s commitment, and that such an interpretation would make borrowing large sums of money — such as for the proposed gasline project — more difficult for the state.
Supporters of both proposals said the differences are a matter of philosophy. Teal likened the situation to choosing a mortgage — his plan has smaller payments over a longer period of time, and the governor’s being the cheapest viable option.
That difference in thinking is one that could jeopardize the rest of the bill, which includes the proposed BSA increase, said Rep. Cathy Muñoz, R-Juneau, who sits on the finance committee.
“The retirement proposal that’s contained in the education bill is enough for me not to support the entire education bill,” Muñoz said. “I do not believe that it makes sense to commit future generations of Alaskans to current obligations that were accumulated in the 70’s, 80’s, 90’s and up until 2006 when we changed our retirement system.
“It’s wrong to depend on future generations — my grandchildren — to take care of that obligation,” she added.
Despite the question of how the state will address the problem in the retirement system lingering all session, Muñoz said she’s only seen the information in the new proposal in “the last few days.”