The Alaska Retirement Management Board Friday delayed making a decision on how much extra money needs to be set aside for future pension costs in the next year’s budget.
The minimum amount the board needs to allot is $610 million, actuarial firm Buck Consultants told the ARM Board, which met in Anchorage last week.
Some board members, however, said the state should be setting aside an extra quarter of a billion dollars next year.
The board manages almost $20 billion in savings meant to help pay the cost of future pension and health care benefits for state workers, municipal employees and teachers.
Those savings, however, are estimated to be $11 billion short of where they need to be, and each year the state puts aside extra money to help pay that cost.
How much that extra amount should be, and how it should be calculated, can be complicated and controversial.
It’s done using what’s known as the “level dollar,” instead of the method they used for the current year, known as “level percent of pay.”
The difference in methods, said Mike Barnhill, deputy commissioner of the Department of Administration, means that the extra payment next year would have to be $868 million, instead of $610 million.
Some board members said the state should have adopted the level pay method earlier, with one calling it “almost criminal” that they didn’t.
The state’s unfunded pension liability will continue to grow because of the underfunding, they warned.
In 2008, when the state was flush with oil revenue following the adoption of the ACES oil tax and surging oil prices, it used the level pay method and put millions extra into savings.
Barnhill, however, said he was reluctant to characterize what the board had done in previous years and that other factors, such as 2008’s stock market collapse, also needed to be considered. The use of the level percent of pay method might have also had benefits, he said.
Because under state law, costs for cities and school districts are capped at certain amounts and the state pickups up the excess, the ARM Board’s action can greatly affect future state budgets.
Sam Trivette, a member of the ARM Board from Juneau, Friday recommended delaying action until a later meeting.
“This is a fairly complicated issue,” he said, and noted the board had only the bare minimum quorum necessary for a decision.
“I frankly don’t feel prepared to make a final decision on this,” he said.
The board agreed, and Barnhill said a later decision would not present problems for the state.
Office of Management and Budget Director Karen Rehfeld said later they won’t begin preparing Gov. Sean Parnell’s budget proposal until late August or September.
The state isn’t locked into funding a specific amount, but has been funding the amount as determined by the ARM Board, she said.
“Our interest of course is to make sure that we protect the health of the retirement system and are also able to manage the costs over time,” she said.
The board initially met June 14, when it learned the extra retirement costs in the state budget next year will amount to $610 million.
State officials knew the cost for the fiscal year 2013 budget, which will be adopted by the Legislature next year, would be higher.
That’s because the state’s actuaries recalculate the state’s future retirement costs every year, and determine whether Alaska has enough money in savings to pay future years costs. They don’t, and the difference between what they have and what they expect to need is known as the state’s unfunded liability.
The ARM Board was told in the spring that amount had grown to nearly $11 billion.
One reason for the increase: The board last year reduced what may have been unreasonably optimistic expectations for investment earnings.
Dropping the projected return from 8.25 percent to 8 percent played a significant role in the increasing estimates of unfunded liability, actuarial firm Buck Consultants told the board.
The state is required by law to set aside additional money on each employee’s salary to help make up the difference. Because that would likely be crippling to smaller public employers, the state picks up the portion of that above a certain level for municipal employees, teachers and others.
The state several years switched from a traditional pension plan, known as a defined benefit plan, to a 401(k)-style defined contribution.
That was intended to save the state money in the future, but also it later was amended to have the state pick up some of the rising costs.
That additional contribution amount comes to $307.2 million into the Public Employee Retirement System and $302.8 million into the Teacher Retirement System, for a total extra $610.1 million to the budget next year.
If the state weren’t picking up that share, it would cost cities 35 percent additional on each employee’s pay, and school districts more than 50 percent additional on each teacher’s salary.
Not all the news was bad.
Chief Investment Officer Gary Bader said investment returns this year have far exceeded projections, helping to close the gap.
Investment consultant Michael O’Leary of Callan Associates said that was unexpected, and particularly surprising given events such as the euro crisis, as well as an earthquake, and nuclear meltdown in one of the world’s major economies.
“You probably wouldn’t have expected to markets to produce positive returns,” he said. “They did.”
Department of Revenue Deputy Commissioner Jerry Burnett also said that Alaska was doing fairly well compared to other states, as it is one of the few that pre-funds medical costs along with pension costs.
A new study by Fitch Ratings, he said, shows almost everyone else is in worse shape than Alaska, and the state’s funded ratio to be 83 percent instead of the previously calculated 63 percent.
“That doesn’t mean you still don’t owe the $12 billion, or whatever it is,” Burnett said, but said Alaska’s conservative method of calculating its unfunded liability was the right way to do it.
Both legislators and members of the ARM Board say they need to have more discussions on ways to cope with the cost of the pension liability.