When it comes to retirement benefits, the state is looking at a $12 billion shortfall. Just how that’s going to be paid off is expected to be a big issue for the Legislature next session. The Parnell administration is thinking about putting hundreds of millions of dollars into the state’s retirement funds to help close the gap.
So let’s just get this out of the way: Alaska is not Detroit. It is not currently at risk of going bankrupt. It’s not even at risk of breaking its constitutional obligation of paying out retirement benefits. But having billions in unfunded liabilities will put constraints on current and future budgets. If you have to dip into the state’s general fund to cover pensions, that means less money for infrastructure projects, school operations, and the other things government pays for.
Kris Erchinger is part of the Alaska Retirement Management Board, and she says the pension shortfall is already having an impact on the state’s budgeting process.
“The unfunded liability of the retirement system is astronomical, and it does have — and will continue to have — a significant effect on the state of Alaska going forward,” says Erchinger.
The state’s had a gap in its retirement system for over a decade, because the DotCom bust and faulty actuarial projections. But the retirement burden really grew in 2008, when the state lost a fifth of the money it had saved because of the recession.
There are a few ways the state can slow the growth or even shrink the unfunded liability, and it’s already taken some serious measures. It closed the pension system to new state workers a few years ago, and put them on 401(k)-style plans. The state is also making scheduled payments to reduce the shortfall, and it also hopes to see a high rate of return on the investments it already has.
The Alaska Retirement Management — or “ARM” — Board wants to do even more to get the state’s unfunded liability in check. On Friday, Erchinger presented to the Senate Finance Committee, and she made the case that injecting more money into the retirement fund now would be better for the state’s financial health in the long term.
“The point of that isn’t just to get more money in the system,” says Erchinger. “It’s so that that money can earn interest that will pay pension benefits, reducing the need for future contributions from the state down the road.”
The ARM Board would like to see the state put $2 billion into its retirement funds, spread out over four years. On top of this “cash infusion,” the board wants the state to front-load the payments it’s already making to cover the unfunded liability. Because the cost of those payments is expected to rise with time, Erchinger argues it’s better to pay more of that money now, while the state has flush budget reserves.
“So the pain is going to be very real very quickly,” says Erchinger. “But it’s going to result in less pain down the road when the State of Alaska is less likely to be able to pay for the pain because of lower oil revenues.”
Because pension payments are split between the state and municipalities, Erchinger also says that dealing with the unfunded liability sooner rather than later would give cities more financial security and flexibility with their budgets, since this problem is weighing on them, too.
At Friday’s meeting, officials from the Parnell administration said there was an “emerging consensus” for putting some lump sum amount into the retirement system, but that they didn’t have a particular number in mind yet.
As far as the ARM Board’s plan to front-load contributions from the state from here on out? That got a little bit of push back from the state’s Legislative Finance Division, a non-partisan state agency that counsels lawmakers on budget issues. Director David Teal cautioned against overreaction. He says the state is already on a plan to close the unfunded liability without putting extra pressure on the budget for the next decade.
“The road to recovery from large losses can be very long — so long that the system can appear to be broken,” says Teal. “And I think that’s where we are right now, is that people think the system is broken. I would argue that the system is unlikely to stay broken in the long run, because if you pay what you owe, the system will fix itself.”
The governor will reveal just how much of the state’s budget he’s willing to put toward bolstering the retirement system when he releases his budget next month.