Parnell proposes $3B toward pension shortfall
Gov. Sean Parnell is proposing putting $3 billion from a state savings account toward paying down Alaska's roughly $12 billion pension shortfall.
The state is currently on a payment schedule that calls for increasing payments over the next 15 years, on a pace expected to exceed $1 billion before dropping. The payment for the current fiscal year is $629 million and scheduled to be $703 million next year, according to Parnell's budget office.
While Parnell previously supported staying on that schedule, he said he's become convinced, in part from feedback from ratings agencies, that that option isn't sustainable and will put too much pressure on the state budget. He said his plan is "the right way to go."
His budget office, in information released Thursday, said Parnell's plan would allow for flat $500 million payments after the $3 billion infusion with a final $131 million payment in 2036. Payments would be extended three years longer than under the current schedule but the budget office says the state also stands to save about $2.1 billion in the long haul with his plan under current estimates.
Parnell's budget director, Karen Rehfeld, presented the plan at the Alaska Retirement Management Board meeting in Anchorage on Thursday. The board itself has been advocating a cash infusion and payment changes as a way to better address the issue.
Rehfeld told the board the unfunded liability "is the single largest driver of our operating budget cost. It poses the greatest risk to our AAA bond rating and if we do not address it, it will negatively affect future Alaskans."
The scheduled difference in payment between this year and next is about $74 million, an amount that she said is larger than the general fund budgets for a number of state departments. But Rehfeld also said a board proposal that would significantly increase contribution payments in the next few years, beginning at $975 million next year, would not be sustainable.
The state relies heavily on oil revenues to fund state government and higher oil prices in recent years helped to fatten state coffers. The state started the current fiscal year with about $16 billion between the constitutional and statutory budget reserve funds alone. But with revenues declining due to a mix of factors, including decreased oil production, the governor and lawmakers already expect to have to rely on savings to help balance state budgets.
Parnell said the state can afford his approach on the pension issue, noting that he will again be asking legislators to limit spending.
A stock market dive, rising health care costs and actuarial mistakes contributed to the unfunded pension liability. Alaska went from a defined benefit, or pension, program to a defined contribution, or 401(k)-style, benefit in 2005.
Parnell is proposing moving $3 billion from the constitutional budget reserve fund, the flusher of the two funds and the harder for legislators to tap, with about $1.9 billion going toward the public employee retirement system and $1.1 billion toward the teachers retirement system, according to the budget office.
Sen. Bill Wielechowski, D-Anchorage, applauded Parnell's move.
"We have savings, you have this debt. I think most people agree it makes sense, if you can pay off something now and save yourself billions of dollars down the road, that makes good financial sense," he said.
"I'm glad the governor has come around on this," he said, "but it's something that we've been pushing for years."
Wielechowski in 2012 supported legislation by fellow Democratic Sen. Johnny Ellis that would have moved $2 billion from the constitutional budget reserve into a special fund intended to help address the pension debt. It gained no real traction.
Senate Finance Committee Co-chair Pete Kelly said he liked the direction Parnell is going on this and said his proposal would get fair scrutiny from Kelly's committee.
Kelly, R-Fairbanks, said getting the money from the constitutional budget reserve probably makes more sense than from the statutory budget reserve because it requires a broad consensus among lawmakers — an affirmative three-fourths vote of the members of each the House and Senate. He said the statutory reserve makes more sense for year-to-year cash-flow needs.
Wielechowski said he would probably now rather see the money come from the statutory budget reserve, saying as a state, you want to protect the harder-to-access funds in the constitutional reserve, particularly if the state starts running large deficits in the future.