Cities, school districts bear the burden of rising retirement costs

Cities and school districts hit last year with state funding cuts are preparing for more economic hardships this year from the rising cost of employee retirement benefits.

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As of June 30, 2002, the state was underfunded about $2.5 billion for the Public Employees' Retirement System, or PERS, which covers most state and local government employees in Alaska. The Teachers' Retirement System, or TRS, was short about $1.7 billion, for a total gap of $4.2 billion for both systems.

The state in turn has increased the amount government entities and school districts must contribute to make up the difference.

The city of Juneau has to find about $1 million in cuts or new revenues in 2005 to cover the gap and the Juneau School District needs about $900,000 worth.

The retirement plans are made up of contributions from employers and employees, based on annual evaluations of how much is needed to fund benefits. But the increased costs, for now, will come solely from employers.

Melanie Millhorn, director of the state Division of Retirement and Benefits, said the gap is a result of poor performance in the stock market and the rising cost of health care.

"(Those numbers) are just a snapshot in time," she said, noting an upturn in the stock market could ease the deficit. "I feel confident that we will be able to rebound out of this situation."

She said about 160 communities and political entities contribute to the PERS plan, which is invested by the Alaska State Pension Investment Board.

The PERS investment fund lost $927 million from July 2000 to June 2002 and TRS lost $471 million, according to the Division of Retirement and Benefits. Skyrocketing health care costs also contributed to the fund's liability.

The PERS board, in spring 2003, adopted a 5 percent increase in the amount PERS employers must pay into the system. The TRS contribution for employers also has increased by 4 percent.

Juneau Finance Director Craig Duncan said state and city employees who run their retirement through the PERS plan will not be directly affected by the higher percentage employers must contribute. But they could be indirectly affected through budget cuts.

Juneau employers now pay 6.22 percent into the PERS system. That means for every $100 an employee earns, the employer must pay $6.22 toward that employee's retirement.

That rate will cost the city about $1.4 million in fiscal year 2004, which runs from July 2003 through June 2004, Duncan said.

He said the PERS Board increased the rate based on the assumption that it will take an average payment of 24 percent by employers to fully fund the program. That means, failing a huge upturn in the stock market, the employer contribution is expected to increase by 5 percent each year through 2008. Each 5 percent increase represents about $1 million out of the city's pocket, Duncan said.

"This is our biggest budgetary impact," Duncan said. "That will have a huge impact over our total wage cost."

Millhorn said the 4 percent increase in teachers' retirement costs in 2005 will raise the average employer contribution to 16 percent, up from 12 percent. That will cost the 57 school districts that use TRS about $22 million in 2005, she said.

The Juneau School District already has considered eliminating some teacher positions next year to make up for an overall budget shortfall of about $2.45 million.

Millhorn noted the state has established a subcommittee to solicit cities and school districts for ideas on how to fix the program.

Senate President Gene Therriault, a North Pole Republican, said he expects the subcommittee will present a comprehensive package to the Legislature next year to pursue any necessary changes in the system.

• Timothy Inklebarger can be reached at timothyi@juneauempire.com.