Mayors grapple with growing debt

Peninsula municipalities face higher retirement costs

Posted: Sunday, April 30, 2006

The huge unpaid bill owed by Kenai Peninsula municipalities to their public employee and teacher pension programs is getting bigger.

On June 30, 2004, state actuaries estimated that municipalities across Alaska owed a combined $716.2 million to the Public Employee Retirement System, or PERS. A year later, that number had grown to an estimated $916.7 million, better than 1.5 times all the property taxes collected by every city and borough in Alaska, excluding oil and gas property taxes.

The Kenai Peninsula’s share of that unpaid obligation is roughly $38.4 million.

At a meeting Friday in Homer of the Kenai Peninsula Conference of Mayors, delegates heard from Larry Semmens, finance director for the city of Kenai and a member of the Alaska Retirement Management Board, created last year to implement changes in the way state retirement programs are managed.

What they heard was disquieting. Semmens told the mayors the rates that municipal employers will pay into the PERS in fiscal year 2007 — in the case of the borough, 22.81 percent of total payroll, or $3.2 million — is very likely to jump significantly in fiscal year 2008, perhaps in excess of 32 percent.

Meanwhile, the rate actuaries say should be paid into the Teachers Retirement System, or TRS, could be upward of 42 percent.

Paying off what already is owed would take 25 years at those rates.

“This is not a short-term problem,” Semmens said.

“That puts the borough in a ticklish situation because, while we only have somewhere in the neighborhood of 230 employees on the borough side, there are more than 1,200 employees on the school district side,” said borough Mayor John Williams.

Semmens said if the Legislature continues to fund the teachers’ program through the schools’ foundation formula, the increased payments to TRS could raise the level of the so-called “cap,” the amount local communities may, by law, contribute to the operations of schools.

The borough has always funded to the cap, but that cap keeps increasing, calling into question how long the borough will be able to continue doing that.

Williams said just meeting the increases to PERS and TRS and funding to the cap might require an increase to the property tax rate of almost 1.5 mills — $150 a year for a $100,000 home.

Jim Hornaday, mayor of Homer, said it would eat up all the property tax revenue collected by the city annually just to pay for PERS.

Seldovia Mayor Richard Wyland said making payments might be almost impossible for that small community.

“We’re running a deficit budget right now,” he said.

Soldotna Mayor Dave Carey said he had difficulty accepting the “somewhat flexible” actuarial tables that in just a couple of weeks had increased the total amount of the retirement debt. He laid blame for the current level of debt squarely at the feet of the state Legislature, which in the late 1990s cut the amount municipalities were required to pay into the retirement system.

Lawmakers then were anxious to cut government spending and acted, in part, on predictions by financial advisors that the healthy stock market made high payments unnecessary. That advice turned out to be wrong, leaving the growing debt within the two retirement systems that today approaches $6 billion.

Last year, state lawmakers passed a law creating a new pension system. It has yet to be implemented, but would replace the existing defined-benefit program with a defined-contribution system, which Semmens said would be easier on employers (municipalities and the state) because they would know exactly what they were required to pay each year.

The new system would apply only to new employees, called “tier-four” employees, differentiating them from the three tiers in the current system.

Carey worried about the impact of the new defined contribution tier-four program.

“Tier four will repulse employees,” he warned. “It will make people not want to work for us,” he said, adding that Alaska might not be able to compete for experienced and capable workers in the future. “I hope to never see tier four implemented.”

Semmens said he supported the new system because it gives employers a defined expense.

“We don’t need any more surprises,” he said. “The whole world is going to defined contribution plans. We will be as competitive as anyone else.”

The Legislature is currently considering a bill that revises last year’s legislation, delaying the new tier for another year. Semmens recommended support for the House bill, but without the delay. The mayors are expected to extend that support.

Bill Popp, aide to Mayor Williams, discussed a form of municipal revenue sharing considered by state lawmakers that might affect state help on PERS and TRS.

It would pay small municipalities a minimum of $75,000. The Kenai Peninsula Borough would be in line for about $4.8 million, an amount equivalent to about 1 mill’s worth of property taxes. However, there is no consensus on such a program as yet, he said.

“What seems to be gelling is a one-time payment this year based on Amerada Hess (settlement money) and the general fund, and to come back next year and come up with a more defined, sustainable structure,” Popp said, adding that such a payment might come “with no strings,” meaning the money could be used for retirement system payments or anything else, at the discretion of the municipality.

However, he also said a big question mark is whether the Legislature would fund PERS and TRS if they approve a municipal revenue sharing plan.

Williams said that, “positioned right,” the Legislature might move to tap Permanent Fund earnings, but lawmakers and Gov. Frank Murkowski had told him that selling that idea to the public would be up to local officials.

Williams said that studies have shown that taking a third of the unappropriated earnings to fund revenue sharing programs would have little impact on dividends. By 2011, he said, the hit would amount to about $9 on a dividend expected by then to have reached $1,800. $9 from a check worth $1,800 would be far better than taking a $900 hit through rising property taxes, Williams said.

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