JUNEAU -- Legislators searching for solutions to Alaska's school funding battles are finding that their hands may be tied by costs of ongoing retirement funding, even as they deal with other education needs and problems.
A series of major education issues are confronting Alaska. Those ranging from a strong desire from local school districts to an increase in the Base Student Allocation, the per-student amount each district get, to the state's implementation of a new school "stars" rating system to replace the failed No Child Left Behind process, and implementation of new education standards known as "common core" and state standards testing.
All, of those may be shoved aside by increasing retirement costs stemming from the $12 billion unfunded liability in the Public Employees Retirement System and Teacher Retirement System.
Budgets under threat
Over the last 10 years, education funding has increased by a billion dollars a year, but a big chunk of that was for paying off the retirement debt, said David Teal, legislative finance director. That amounted to $334 million this year, a cost that wasn't even part of the budget a decade ago, he said.
That amount is growing, and concerns are rising.
Teal said the top two questions his non-partisan budget analysis office is getting from legislators are about retirement and education. That's a strong indication of what issues are going to be in the forefront of legislative debate next session, he said.
Teal himself has been raising concerns about the cost of retirement funding for some time, and has been briefing the interim meetings on that issue as well.
Legislators this year have been focusing on topics such as education in a way they haven't done in the past. Last year similar promises were made by legislative leaders that they'd do so, but those meetings never took place.
Next year's legislators, however, will have to cope with fewer dollars available due to the oil tax cuts passed this year.
Teal was stark in his warnings that the retirement costs, for the Public Employee Retirement System and Teacher Retirement System, are threatening to overwhelm state budgets.
The cost of retirement spending, he said, was already larger than the state's Medicaid budget on an annual basis, and is soon to exceed K-12 education as well.
"I think it is safe to say the public doesn't know how much is going to these retirement costs," Teal said.
Who's to blame?
Under questioning from legislators, Teal said there wasn't anyone to blame now, but that failed actuarial assumptions and stock market losses both played a role.
Because of flawed actuarial assumptions, essentially a guess of what future costs would be, Alaska didn't put aside enough money in the past to meet those costs.
The unfunded liability is the difference between what the state expects its retirement trust funds to be worth in the future, and how much money it will need to pay pension and health care obligations for retirees.
The state claimed errors by its former actuarial firm, Mercer, cost it $2.4 billion. It sued, and settled its case for a record half billion dollars. The were another couple of billion in stock market losses he said.
How Alaska will deal with those costs has been debated for the last several years as the scope of the unfunded liability has become known, with the state continuing to make the minimum contributions required by law to the funds each year.
Kristin Erchinger, finance director for the City of Seward and a member of the Alaska Retirement Management Board, urged one of the legislative committees to support the board's call for a cash infusion into the retirement trust funds. Late in the last legislative session the ARM Board proposed a $2 billion deposit, spread over four years.
"The unfunded liability is enormous, and it is growing," she said. That's because the board assumes it will earn 8 percent a year on its investments, but there's not enough money in the trust funds being invested.
Investment returns this year were more than 12 percent, but the state still fell behind, she said.
NEA-Alaska union leader Ron Fuhrer echoed the call for a cash infusion into the trust funds, but wanted it even faster than the ARM Board sought.
"We're hoping the the Legislature will be able to see the wisdom of an infusion of, say, $2 billion, which will then reduce the draw from the general fund in future years," he said.
Because there will be decades of investment earnings on that money, a $2 billion investment will bring down the unfunded liability by a far larger amount than that.
That would then free up money for other expenditures, one of which may well be education, he said.
The growing costs required to pay off the unfunded liability is likely to bring political pressure, Teal warned, when it competes with other expenditures in a time of declining budgets.
There will be tough questions for legislators about "spending a billion dollars a year to bail out bureaucrats' retirement systems," he said.
That's money that some count as education spending, but which doesn't help local school boards balance their budgets.
That's because the state government, which provides most school funding, has assumed direct responsibility for most of the retirement costs.
"Kids never see a dollar of it, teachers never see a dollar of it, the districts never see any of it," he said.
The Alaska Constitution requires that those retirement promises, once made, must be kept. Gov. Sean Parnell and legislative leaders have said they're committed to doing that.
Contact Pat Forgey at pat(at)alaskadispatch.com