State takes on larger share of retirement

Tentative agreement would contribute an additional $193 million to the system

Posted: Friday, May 04, 2007

State lawmakers have tentatively agreed on a plan to shoulder a portion of municipalities' and school districts' soaring retirement costs and set up a method of paying down a staggering multibillion dollar shortfall in the state retirement system.

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The Senate Finance Committee passed legislation this week that would have the state sink an extra $193 million into the system just for the next fiscal year, which begins July 1.

Deputy Commissioner of Administration Kevin Brooks told lawmakers to expect an even higher price tag the following year, $218 million.

"It will continue to rise for one more year then we will start to see the downward trend kick in on the rates that we built into this piece of legislation," Brooks said.

The problem is that the projected cost of retirement 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 estimated $8.5 billion gap threatens to cripple state, municipal and school district budgets over the next quarter century.

The proposed legislation sets up a substantially more generous version of the cost share plan first proposed by Gov. Sarah Palin.

It would lower the required amount that municipalities and school districts must pay into their employee retirement plans. It sets the rate for the Teachers Retirement System at 12.5 percent of payroll and the rate for the Public Employees Retirement System at 22 percent of payroll. The state would pick up the rest of the cost.

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"We are in full support of the bill. We realize we need to move forward with this," said Kathy Wasserman, executive director of the Alaska Municipal League, which represents local governments around the state.

School districts' contributions are currently 42 percent, although the state has boosted education funding in recent years to help districts meet their costs.

Municipalities' rates vary widely, although the average is about 37 percent. The state also provided financial assistance to communities in recent years, though not all used the money to pay down their liability.

The Senate bill would reward the 24 communities that did put the money into retirement, paying an extra $7.2 million into the account on their behalf, helping lower their debt. The bill also provides $5.4 million as a rebate to those employers currently paying below the 22 percent level.

The remaining $180 million is already accounted for in both House and Senate versions of the state operating budget.

The bill was delayed several days as the finance committee awaited action from the Alaska Retirement Management Board.

The plan's figures were based on the board rolling back the overall required contribution rate for public employees from 39.7 percent to 32.5 percent. The higher rate would have required putting an extra $125 million into the pension system next fiscal year and a likely corresponding reduction in the capital budget, which is expected to be unveiled in the finance committee later this week.

The board at a special meeting on Tuesday unanimously approved a resolution supporting the lower rate.

Board member Larry Semmens said the board was willing to adopt a different method of spreading out the payments to create a "smooth glide path."

"The bottom line is you may pay a few more dollars in interest because you don't put as much in up front, but the affordability on a year-to-year basis is better," Semmens said.

Semmens, the finance director for the city of Kenai, said municipalities asked for affordability, stability and predictability from the state.

"This at least addresses predictability and stability," Semmens said. "Affordability is a community-to-community issue."

House Finance Co-chairman Kevin Meyer, R-Anchorage, said he anticipates the plan will move quickly through the House once it has passed the Senate.

Another proposal to use pension obligation bonds to leverage more money for the system is also moving through the Legislature and the Palin administration is pushing for a large cash infusion into the teacher retirement system to pay down the debt quicker and relieve the burden on the state's general fund.

Meanwhile, another proposal in the Senate Finance Committee could send more money to communities in the form of revenue sharing.

Sen. Lyman Hoffman, D-Bethel, said he is trying to garner support for a bill that would distribute another $48 million to all communities, the same amount Gov. Palin has touted for revenue sharing.

The bill, introduced in committee on Thursday, distributes the money through a formula that takes into account the amount communities would already be getting through the retirement fix.

Hoffman said the plan would help communities that are not part of the state pension system. It also would cover unincorporated communities that have not received revenue sharing in the past.

Communities like Anchorage have said they would use the revenue sharing to offset property taxes. Many rural communities say they need the money to survive.

"I anticipate there will be widespread support throughout the communities and I hope that support will spread through the building," Hoffman said.

The measures are Senate Bill 125 and Senate Bill 74.

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