JUNEAU — Gov. Sean Parnell on Thursday said a House Finance Committee proposal to address the teachers’ retirement system is “immoral” and shifts the obligation to future generations.
Parnell said he wants the proposal removed from his education bill, calling them two very separate issues. The committee added the retirement piece to its rewrite of the bill, HB278. A proposed amendment to pull out that issue failed on a 5-5 committee vote Wednesday.
The bill is scheduled for a vote on the House floor Friday. If approved, it would then go to the Senate.
Lawmakers have yet to propose a plan for addressing the public employees’ retirement system. Between the two systems, the state has an unfunded pension liability of about $12 billion.
Parnell in December proposed taking $3 billion from the constitutional budget reserve toward addressing the total obligation. About $1.9 billion would go to the public employees’ system, and the rest to the teachers’ retirement system. The plan overall called for flat annual payments of $500 million over 20 years, with a $131 million payment in 2036, according to information from Parnell’s budget office. The teachers’ retirement share of the $500 million would be about $340 million. Trust-fund earnings would eventually be used to pay benefits.
One of his goals was to ease pressure on the state budget, given the current plan calls for escalating pension payments over the next 15 years, on pace to top $1 billion a year before declining.
The committee proposal laid out by Legislative Finance Division Director David Teal calls for $1.4 billion toward the teachers’ system and $100 million toward a reserve fund. The plan calls for starting with smaller annual payments and payments stretched over a longer period. It could exhaust the trust fund over a period of decades and rely on contributions to pay future benefits.
Supporters of that approach question how affordable Parnell’s plan is in light of future obligations. Some lawmakers also have taken exception to the fact he did not propose his plan as a bill.
Rep. Mia Costello, R-Anchorage, the only finance committee member to recommend a “do pass” vote on HB278, said she took comfort in knowing the pension approach proposed in the bill would be written in law. Other members — some of whom said they were open to further discussion on what might be the best option — offered no recommendation or recommended the bill be amended.
Parnell, in an interview, said the state is constitutionally obligated to make good on its pension promises and has done so. He said the issue of making a payment had not been in question before it was raised by critics of his plan.
“With their plan, they’re addressing the perceived squeeze in revenue across the next five years, next 10 years,” Parnell said. “But they’re pushing that debt off to our great-great grandchildren. And I think that’s immoral and not justified.”
An actuarial review of the option, released late Thursday afternoon, said the proposed plan “adds risk to the pension systems and is counter to actuarial standards regarding the funding of the pension plans.”
Sen. Anna Fairclough, R-Eagle River, chair of the Legislative Budget and Audit Committee, contracted with the actuarial firm Gabriel Roeder Smith & Co. to analyze Teal’s model and proposed options for the teachers’ and public employees’ systems.
Consultants with the firm, in a report, said if the only issue under consideration was funds in the trust accounts, “the answer would be that there is not a positive benefit to this course of action; we realize, however, that issues are being considered beyond the pension trust.” There are also state budget considerations.
A Parnell administration analysis of the two approaches showed Parnell’s plan costing about $8.1 billion and getting rid of the unfunded liability by 2038. It showed the committee proposal costing $20.7 billion and getting rid of the liability by 2073.
The numbers cited by the actuarial firm were a little higher for both.
Teal called such a comparison misleading.
“It’s absolute nonsense to simply add up money in 2015 and compare it to dollars in 2070, or ‘60, or ‘50,” he said in an interview. “There is a time value to money. And money way out there just is not the same as a dollar today.”
Teal, in a written response to the actuarial review, vigorously defended his position. While he said he agreed decreased funding to a pension system increases risk, he also noted the risk with Parnell’s plan if earnings fall short of expectations.
The two approaches simply amount to a difference in philosophy, he said.
The “only sensible way” to pay off the obligation is with a lump sum, Teal said. But that would take a big chunk of the state’s savings. The unfunded liability for the teachers’ system is about $4.5 billion.
It’s like with a house, he said. It’s great if you can afford to pay in cash or even to get a 15-year mortgage, which is the comparison he draws to the governor’s plan. But if you can only afford a 30-year mortgage, which takes longer to pay off, there’s nothing wrong with that, either, he said.
Revenue Commissioner Angela Rodell has warned that the committee plan could be viewed by ratings agencies as a backing-away by the state on its obligations and affect Alaska’s bond rating. A presentation to the Senate Finance Committee in February by Revenue officials, including the state’s debt manager, indicated pension liabilities were about 10 percent of the rating sub-factors considered by agencies.
Parnell said he couldn’t speak to that issue, but he said an impetus for his plan was what he heard from agencies last year, and that was that Alaska’s “one vulnerability” to its AAA bond rating was its unfunded pension liability. Losing that rating would cost the state money in terms of its cost of debt, he said.