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As Alaska retirement debt soars to $12 billion, debate over how loud to sound alarm

Pat Forgey

Retirement debt for Alaska state workers has ballooned to nearly $12 billion, following years of inaction by leaders.

Now the Alaska Retirement Management Board, which oversees state retirement trust funds, says it will take on new responsibilities for seeing that debt get whittled down and ensure the state can keep its promises to retirees.

Board members said at meetings in Fairbanks last week that they, too, share responsibility for the lack of action by governors and legislators that has allowed the debt to continue to grow. That debt is the future cost of pension and health care that’s known as "unfunded liability."

"This board has got to figure out a more effective way of educating the people who will be making the decisions, who have challenges in the short run to balance the state budget, but who may not have a long-term idea of what the impact will be if we keep kicking the can down the road," said Kris Erchinger, a board member who also serves as chief finance officer for the city of Seward.

The board last year asked the Legislature for a $2 billion cash injection, spread over four years -- but the legislature took no action.

Would a lobbyist help or hurt?

Board members even considered hiring a lobbyist to work specifically on that issue.

"It's not the goal of the ARM Board to get sideways with the legislators or anyone," Erchinger allowed. However, the board took one confrontational step, changing the way state retirement contributions are calculated from the current "level percent of pay" method to what's known as "level dollar."

That results in higher immediate costs, which over the long term will save the sate $2 billion, according to board member Martin Pihl of Ketchikan, a retired pulp mill executive.

"Clearly the level percent of pay (method) is much more expensive in the long run, level dollar is much more expensive in the short run, but saves a tremendous amount in the long run," Erchinger said.

The board is now waiting to see whether that change will be included in Gov. Sean Parnell's budget for next year, which should be released to the public in December.

Members of Parnell's administration argued against the change, but Pihl said he was encouraged after having met with Parnell following an August ARM Board work session that was attended by Parnell's budget director.

"Not long after that meeting I had the chance to talk to the governor in Ketchikan," Pihl reported. "It's clear that he is on top of this problem."

Pihl said he urged the governor to take a long-term approach to the issue, and the adoption of level dollar. "The later years show where level dollar is going to produce $2 billion in savings," he said.

The confrontation may not end there, however.

Cash infusion rejected by legislators

Board members said a $2 billion cash infusion request rejected by legislators earlier might not have been the correct amount. Additional actuarial studies are under way, but the amount needed might be as high as $3.5 billion, said board member Sam Trivette of Juneau, a retired state employee.

Since oil revenue began surging into state government in 2006 following the adoption of the ACES oil tax and soaring oil prices, state coffers have bulged with dollars, but the state made only the minimum retirement fund payments required by law.

Actuaries, retirement staff and Parnell's Department of Administration are all working out those numbers, but the benefit of a cash infusion now, when the state has money, is that it could ease the pressure on state budgets later, when it may not.

Without action, annual costs could top $1 billion, he said.

The Department of Administration's Deputy Commissioner, Mike Barnhill, warned that the needs of the retirement trust funds had to align with the state's cash flow.

While the state has billions in savings accounts such as the Constitutional Budget Reserve and the Statutory Budget reserve, it had to dip into reserves to fund the current year's budget, a practice expected to repeat if the oil-tax cut that passed during the last legislative session stands.

Barnhill tried to guide the board away from a possible confrontation, and urged the board to hold off on suggesting anything until after the governor's budget comes out in December.

"I certainly don't want to constrain his discretion to handle this in the manner he sees fit," Barnhill said.

Already too late?

Trivette said they've waited too long already. "I don't think we can wait another four months," he said.

Board member Tom Brice, a union official and former legislator, urged the board to work closely with the Parnell administration to get a proposal that could win political support there -- and with the Legislature.

"I don't know that we want to get out ahead of the governor too far," he said.

Another way of adding money into retirement trust funds is to borrow it with what are known as "pension obligation bonds," and hoping to earn more investing that money than it would cost to pay off the bonds. The profit, then, would augment the retirement trust funds.

The legislature passed a bill authorizing that several years ago, but those plans were set aside after the 2009 stock market crash.

This year's budget proposal includes money to implement that plan, but Deputy Revenue Commissioner Angela Rodell said last month that while pension obligation bonds were still under consideration, no decision has been made to go forward with them.

Another possible option was for the state to lend money to the trust fund in the manner of pension obligation bonds, rather than to go to Wall Street.

Erchinger said the board needs to educate the state's political leaders about the urgency of the problem and possible solutions, but it couldn't tell them what to do.

"I think we have to be very respectful in our role in the process and not overstep our bounds (by) telling people what decision they should be making," Erchinger said.

But they also have as responsibility as trustees to not remain silent. "I fear that us remaining silent is going to result in bad information being used," she said.

Department of Revenue Chief Investment Officer Gary Bader said he feared the reaction hiring a lobbyist would get from legislators, especially when they are also warning they don't have enough money.

"I'm fearful that it could detract from the message you want delivered," he said. "I think it is not going to go down well with people."

No proposal to hire a lobbyist was made, but Board Chair Gail Schubert, CEO of Bering Straits Native Corporation, said she shared Bader's concerns.

"It's a really unusual move, I think," she said.

Contact Pat Forgey at pat(at)alaskadispatch.com