Starting next year, Alaska school districts and municipalities will see huge spikes in what they have to pay into the state's retirement systems.
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The Alaska Retirement Management Board approved the increases in employer contributions to the Public Employees Retirement System and the Teachers Retirement System this week. The increases are meant to whittle away at the systems' $6.9 billion shortfall over the next 25 years.
Those who will be hardest hit say their budgets won't take it.
For example, the city of Fairbanks' obligation to the public employees' system will rise from $2.4 million this year to $13 million for the next fiscal year starting in July, according to the Alaska Division of Retirement and Benefits.
That's half the city's $26 million budget, Fairbanks Mayor Steve Thompson said.
"We won't be able to survive," Thompson said.
The rates of school districts paying into the teachers' system more than doubled across the board. Where school districts are now paying 26 cents for every $1 in salaries they pay out, next year they will be required to pay 54 cents for every $1.
The Anchorage School District's obligation to the two systems will increase about $64 million. Superintendent Carol Comeau said she does not know where the money is going to come from.
"It's going to put us into total turmoil at a time when we're trying to focus on student achievement," she said. "I think it's more serious than anything school districts have ever faced."
The Kenai Peninsula Borough School District, whose school officials say state funding has come up short for years, will see a $12 million increase.
"The only way that we're going to be able to address that is to cut our costs," said Melody Douglas, the district's chief financial officer. "It will affect staff, there is no two ways about it. We're talking about significantly increased class sizes."
The retirement board's decision to increase the rates comes about a year after Gov. Frank Murkowski signed a law that created a retirement tier for new employees in which they participate in a 401(k)-style defined contribution system.
Before last year, new employees were enrolled in a more traditional defined benefit retirement system.
The change was made by the Legislature as a much-disputed first step in plugging a growing unfunded liability in the two systems, but lawmakers were unable to pass any other legislation to knock down the shortfall.
The $6.9 billion unfunded liability is the gap between the retirement systems' total assets and the amount in benefits that would be required to pay all the people in the system.
The new law also removed a 5 percent cap that limited the increases municipalities and school districts would be required to pay toward the public employees retirement system in any given year. The teachers' system did not have a cap, but increases there have mirrored the other system.
The result is that total pension contributions by school districts, municipalities, state government, the University of Alaska and other public organizations participating in the systems will nearly double to more than $1 billion next year.
That's the effects of the new law being felt, said Sen. Kim Elton, D-Juneau, who opposed the bill.
"Those people who pushed and supported and voted for the new Tier 4 ought to be ashamed of themselves. These additional costs, despite all their happy talk, are being passed on to other Alaskans who deliver services at the community level," Elton said.
The increased rates came at the recommendation of a new actuary company hired by the state, Buck Consultants.
Buck Consultants did an extensive recalculation of pension and health care liabilities when it took over from the previous actuary, Mercer, and found that Mercer had underestimated medical costs by about 7 percent, or $399 million, the company said.
Murkowski recommended the increased rates to the retirement board before the board made its decision.
"These contribution rates were calculated to bring the unfunded liability to zero over 25 years," said Deputy Revenue Commissioner Tom Boutin.
Municipality and school district officials say they should not have to carry the burden of making up that shortfall.
"The unfunded liability has to be dealt with, but it can't come from school districts, municipalities and state government," Comeau said.
"It's not something they did wrong. It's because they were told this is what you have to pay and then somebody said, 'Whoops! Wrong figure,"' said Kathie Wasserman, executive director of the Alaska Municipal League.
To soften the blow, Murkowski said he will recommend that the next governor introduce a plan to appropriate about $1 billion from the expected budget surplus. That would cover next year's payment increases and put another $500 million toward the shortfall.
Murkowski also said in a press release that the state may take legal action to recover the costs that were due to errors made by Mercer in its past valuation reports.
Murkowski leaves office in December.
The two main-party candidates in the Nov. 7 election, Republican Sarah Palin and Democrat Tony Knowles, acknowledged the next governor will inherit problems with the retirement system.
Palin said she liked Murkowski's recommendation to use surplus money to cover the increases and pay down the unfunded liability.
"The ARM board decided to set this over 25 years. If we can do it sooner because of surpluses in the budget, then contribution rates can go down sooner by front-loading," Palin said.
She said that she would not favor reinstating the cap on employer contribution increases. Nor does she favor otherwise reversing the new law, although she said some problems will have to be addressed.
"We know that Tier 4 may have some unintended consequences, making it tougher to recruit or retain teachers and emergency workers," Palin said.
But the defined-contribution system was needed, she added: "We know we had to do something different there because of the effects of globalization on our economy."
Knowles called Murkowski's recommendation to increase employer contribution rates and then use state surpluses to cover those increases next year "unnecessary and unfortunate."
"It is not a solution in any way that is acceptable to local governments and school districts," Knowles said.
Knowles said he wants to bring in a third company to analyze the retirement systems and the numbers both Mercer and Buck Consultants came up with. Then, he said, he would work with the Legislature to develop a new defined benefit plan and do away with the defined contribution system.
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