It was interesting to hear Sen. Bert Stedman, sponsor of SB 141, testify before the House Finance Committee in April that the retirement bill the Senate passed would do nothing to relieve state and local governments of the supposed $5.7 billion pension shortfall.
This wasn't the first time the Legislature has heard this, and it is well aware that there will be no relief for a long number of years. It was also interesting that at the same Finance Committee hearing there was no fiscal note. While SB 141 has been trumpeted as a solution, it does come with a very high cost, a cost that is not being discussed by the Legislature.
SB 141 requires full funding of all active members' retirement. Active members are all who are currently working. At this point nobody knows what that will cost. The various government units would be required to pay up front for those that are scheduled to retire soon, and then would have some leeway paying for those who are still some time away from retirement.
Once a person retires, however, it will be impossible to fully fund his or her retirement without extra contributions by the employer. Normally, the system has 25 years to pay for an employee's retirement, but under SB 141 we need to pay off the debt over a few short years, and if anyone took the time to figure the amount, he or she would probably say it is prohibitive.
The actuaries produced charts showing that with an employer contribution rate of 16 percent the teacher's fund would run out of money in 2026. The chart for public employees with a contribution rate of 11.77 percent showed them running out of money in about 2034. So what happens in 30 years if the funds are broke? Most likely there will be more than 25,000 retirees still drawing nearly a billion dollars in benefits a year in today's dollar.
How will these benefits be paid over a period of 30 years since we will have drained the retirement funds? It will take direct appropriations; SB 141 leaves a huge debt for some future Legislature to pay. The only way to avoid this scenario, of course, is to pay huge amounts of money up front. Even then there would still be the unpaid bill for the shortfall associated with those employees already retired.
There is a better way to solve this problem. First, we must understand that the retirement portion of the two systems is well funded. It is only when we add in the projected costs of the medical part, do we run into problems. Thus we must address the medical insurance issue. Secondly, we do not need to be fully funded, as SB 141 requires. Alaska's retirement system has only once been fully funded and the system has paid all of its obligations for the last 50 years. Thirdly, we really don't know what our shortfall is. The legislative council invited an actuary to review our situation and he concluded that there were a number of errors in our actuarial assumptions. Lastly, once we know our financial situation, then we can come up with a plan to solve the problem and stabilize rates.
Currently, we have about $12 billion in the retirement funds generating on average $1 billion a year in income. Loosing $1 billion a year in income does not help solve the problem. Pulling all new employees out of the current system and allowing them to take the employer's contribution in addition to their own, does not solve the problem.
In short, SB 141 does not solve the financial shortfall that the retirement funds are experiencing, but just creates a future financial mess that someone else will have to deal with. Along with all the other problems SB 141 creates in the realm of recruiting and retaining public employees, it is clear this bill needs to be put on hold until a real solution can be crafted.
Juneau resident Jerry Patterson is a retired Juneau teacher and former board member of the Teacher Retirement System.
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