Lawmakers wrestle with retirement

Cost of benefits far outweighs what govt. workers put in

Posted: Monday, April 24, 2006

Last year the Murkowski administration pushed through an overhaul of the state's retirement system to halt what proponents said was a financial drain on an overburdened pension system.

Sound off on the important issues at

The matter didn't end there.

Lawmakers are still wrestling with how to fill a $6.9 billion gap between the state's pension liabilities and assets. They also must pass a 34-page cleanup bill to fix technical problems in last session's legislation - an opportunity for some to revisit the merits of the new retirement plan.

The problem is that the projected cost of benefits over the long term far outweighs what government employers and employees, like state workers, teachers, police and firefighters, are currently paying into the system.

Filling the gap threatens to cripple state, municipal and school district budgets over the next quarter century.

The legislation muscled through last year aims to replace the existing system of monthly pension checks with a 401(k)-type savings plan that shifts the investment risk to employees. Retirees also shoulder a larger share of the cost of medical benefits.

Proponents say it will keep the long-term shortfall from growing even bigger. But new legislation is necessary to fix technical problems in some provisions that were hastily written. Rep. Paul Seaton, R-Homer, is ushering the bill through the House.

"There are people who want to revisit the policy question," he said. "But this is not a policy bill."

Some say the new plan needs more than just tweaking though.

"I believe there will continue to be more problems that pop up, things we haven't even thought about yet," said Beth Kerttula, D-Juneau, whose proposal to delay the start of the new retirement plan by two years failed in the House Finance Committee.

Her amendment was countered by Rep. Mike Kelly, R-Fairbanks, who said the state could not afford to funnel another 8,000 new workers into the old system - what might be expected over two years of normal turnover.

"Let's get on with it and not add new folks," said Kelly. "Attempts to delay this won't help us but will only hurt us."

But some argue that new employees aren't the problem.

Rep. Harry Crawford, D-Anchorage, says the drain is from earlier retirement plans that provided retirees with free health benefits. Soaring medical costs are responsible for about two-thirds of the projected shortfall.

The medical plans were replaced with less generous ones several years ago and Crawford believes the shortfall would have dwindled over time as employers and employees continued to pay into the old system.

But with new employees now paying into a different plan, he said, the pool of money available to the system will shrink.

"So we have exacerbated the problem of the unfunded liability," he said.

Whether or not they support last year's legislation, lawmakers in both houses, and on both sides of the aisle, agree the debt will only compound itself through interest if the state doesn't begin paying it down right away.

The Alaska Retirement Management Board underscored that point when it presented its findings recently to the House Ways and Means Committee. The board was created through last year's legislation to come up with ways to fill the gap between the system's assets and its liabilities.

Skyrocketing medical costs, poor investment returns, employees retiring earlier and living longer have led to a chronic underfunding of the retirement system and contributed to the ballooning shortfall projections, said the board. So have some significant miscalculations on the part of state consultants.

According to the state's new actuary company, Buck Consultants, its predecessor, Mercer Human Resources Consulting, understated future health care costs by about $399 million in 2004, contributing to the growing shortfall projections.

Other problems by Mercer were reported in 2002 as well.

"You don't get to $6.9 billion (shortfall) without a combination of a lot of mistakes. I'd say abuses, but I get chastised for using that word," said board member Martin Pihl.

Asked if communities are feeling the pinch yet, board member Larry Semmens told the Ways and Means Committee to "hold onto your hat."

Next year, municipalities will pay nearly $74 million into the Public Employee Retirement System (PERS) - a 50 percent hike for most cities and boroughs, according to the Alaska Municipal League.

Government employer rates would rise about 10 percent from an average of 22 percent.

"When PERS rates go to 32 percent for employers, it will impact services or it will impact the amount of taxes that municipal government will levy to meet these needs," said Semmens who is finance director for the city of Kenai.

The board recommends that the Legislature tackle the problem head-on, starting this session. The state constitution protects current employees and retirees from changes in their rates and benefits so the money must come from the employers' side.

The board estimates it would take an extra $208 million to cover the shortfall in the teacher and public employee plans in 2007 - an amount House Speaker John Harris, R-Valdez, said could be added into this year's capital budget. It would be competing, however, with lawmakers' pet projects for their districts in an election year.

Despite this year's healthy budget surplus, Harris said, lawmakers may feel more generous next year should the Legislature make good on its promise to overhaul the current method for levying oil taxes thus bringing more revenues to the state.

"That could cover it pretty easily," he said. "There are avenues out there for raising the money without going into our savings."

The retirement board also recommends that the state kick in $18 million to help municipalities with next year's rate increases.

Sen. Bert Stedman, R-Sitka, has introduced a bill that would go a step further. His measure would instead provide municipalities with $29.3 million in retirement relief funds on top of a proposed $28 million in revenue sharing.

Other legislation on the move is a bill that would authorize the Alaska Municipal Bank Authority to issue pension obligation bonds.

Municipalities that participate in the program could invest the proceeds from the sale of the bonds into their pension plans. Savings would result if the debt rate paid on the bonds is lower than the interest earned from the investment of their proceeds.

Pension obligation bonds are considered a legal method of arbitrage and carry some risk because they depend on market timing for success.

None of the solutions before lawmakers get to the heart of what is a nationwide problem -skyrocketing health care costs.

It's a problem Rep. David Guttenberg, D-Fairbanks, would like to address and he's introduced a package of seven bills this session dealing with prescription drug rates. Not one has had a hearing.

Semmens agrees health care costs are unsustainable and the board's health committee is looking at the issue. But for now the board wants lawmakers to focus on closing the growing budget gap.

"The reality of this situation is that scarce resources will have to be allocated to this liability,"

Semmens said. "That's the reality and it has not sunk in."

Trending this week:


© 2016. All Rights Reserved.  | Contact Us