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Arizona Fund Chief To Be Fired After Handing Out Illegal Raises

Last week we brought you the story of an Arizona pension fund that was embroiled in not one, not two, but three separate investigations: The first, a criminal investigation for allegedly inflating asset valuations to trigger bigger bonuses. Second, a workplace investigation into a sexual harassment complaint. The third, a state inquiry into illegal raises of up to 27 percent given to employees of the fund.

The latter investigation wrapped up over the weekend, and the state brought a swift, strong ruling: The Public Safety Personnel Retirement System (PSPRS) will have to fire its top administrator and undo the raises it gave its investment staff. The Arizona Republic reports:

The Public Safety Personnel Retirement System on Wednesday halted illegal pay raises of up to 27 percent that were improperly authorized late last year for five investment-staff employees and were uncovered by The Arizona Republic.

“As of today, we will immediately stop any future payments of the improperly implemented salary adjustments to all five investment staff employees,” PSPRS Chairman Brian Tobin wrote in a letter Wednesday to a state official who further acknowledged the payments violated state law.

Trust administrator Jim Hacking acknowledged Tuesday that PSPRS gave the pay raises without the approval of the state Department of Administration, as required by law. Trust officials refused to say who authorized the pay increases, but Hacking has final authority in all personnel decisions.

Jim Hacking, the fund’s top administrator, is now on leave and is expected to be fired by July 21. He had no comment on the matter.

These raises weren’t your run-of-the-mill, cost-of-living salary increases. On the contrary, the fund was doling out heavy chunks of change to its investment staff, according to The Republic:

Records show the pay increases ranged from 7.5 percent to 26.7 percent, with four of the employees getting annual salary increases in excess of $22,000. Trust officials refused to say how much had been illegally spent, but records compiled by The Republic indicate the total amount in raises was roughly $86,000.

The illegal raises are the latest problem for the trust, which is under a state workplace-violation investigation and a federal criminal probe. The $7.9 billion trust provides retirement benefits for Arizona police officers, firefighters, elected officials and prison guards.
“They are spending money that is not theirs,” said Levi Bolton, executive director of the 14,000-member Arizona Police Association. “Why not just go out and buy a pony?”

More specifics:

Those receiving the raises were:

• Mark Steed, chief of staff. His pay increased by 26.7 percent, or $27,142, to $128,741.

• Shan Chen, lead portfolio manager. His pay increased by 19.4 percent, or $22,296, to $136,991.

• Mark Lundin, deputy chief investment officer. His pay raise was the only one not retroactive. His pay increased 13.46 percent, or $22,890 to $192,890.

• Martin Anderson, deputy chief investment officer. His pay increased by 13.3 percent or $24,400, to $208,000. Hacking also gave Anderson a three-year contract on June 1 that includes guaranteed raises and a $69,000 retention bonus in 2017.

• Vaida Maleckaite, investment operations analyst. Her pay increased by 7.5 percent, or $5,895, to $83,895.

Did the staff deserve raises? Who knows. The PSPRS was only 60% funded as of 2012, which doesn’t reflect all that well on the fund’s management.

While Hacking is surely his way out, he may take a good chunk of money with him. That’s because the fund’s board is now tasked with negotiating a settlement package with Hacking. The board extended his contract last December, and it lasts until July 2015. He currently makes $234,000 a year.

An Under-The-Rader Bill in Illinois Would Set Up Another State-Run Retirement Plan

Illinois has the worst funded pension system in the United States–40.37 percent funded as of 2013–which is why it’s a significant news item that state lawmakers are trying to establish another state-run retirement system. Interestingly, these efforts have garnered very little media attention. But the idea is edging closer to becoming law, as the bill passed the Senate in April and now waits in the House.

The bill, called SB2758–which you can read in its entirety here–would set up a 401(k)-style plan for all businesses in the private sector who don’t already have a retirement plan. All eligible employees would be automatically enrolled, although there would be an opt-out option. And the program would be run by Illinois Department of Revenue. Reboot Illinois has more:

The proposed program would require employers who employee over 25 workers and who offer no retirement plan to automatically enroll their employees with a 3% payroll deduction. The employees could opt out at any time or change the contribution level. These retirement accounts are totally portable, and the money would never enter the state treasury but would instead be owned by the worker. The assets would be pooled to ensure low fees and secure investments. Simply put, the plan would make it easy for employees to save their own money for retirement without burdening employers or costing taxpayers a penny.

The program would be overseen by a Board chaired by the state Treasurer. The bill lays out a simple concept: automatic enrollment in a retirement savings account that belongs to employees and not politicians and is managed by proven private vendors. To make it a reality, we need a state Treasurer who is committed to transparency, knowledgeable about finance, and relentless in fighting for the financial security of ordinary people.

A 401(k) plan is much safer for the government to administer than a defined-benefit plan. But Illinois has a poor track record when it comes to maintaining a sustainable retirement system, and it’s that angle that has people worried about the state’s ability to run a retirement system. That includes John Giokaris of the Illinois Mirror:

If experience teaches us anything, the entry of Illinois state government into the non-public employee retirement fund marketing and investment oversight business ought to be a non-starter. SB 2758 attempts to construct a government program that largely duplicates IRA services already widely available in the private market for anyone interested in retirement savings. It exposes the state and private employers to a liability risk, despite the bill’s purported protections against lawsuits (this is Illinois, after all). It also opens the door for likely litigation over whether a state can compel participation in a program that Biss and Frerichs are selling as “voluntary.”

The reason for the bill is simple: Illinois’ private sector workers aren’t saving enough money. And they shouldn’t expect Social Security to help them, because it won’t be enough. From Reboot Illinois:

Social Security was never intended to be a sole source of retirement income. Indeed, the average Social Security payout per month is $1,281. Unfortunately, in Illinois, the median amount of money in retirement accounts is $3,000. Together, these two numbers tell us that far too many Illinois residents will likely to live in poverty when their working days are over. They should not have to choose between paying for groceries, utilities or their prescriptions. They deserve better than that: they deserve a safe, easy way to save for retirement.

Ultimately, it’s up to the government to administer this plan in an efficient, cost-effective way that doesn’t put a target on the back of taxpayers’ heads down the line. You can be sure the debate around this plan will intensify if and when it passes the House. Pension360 will keep you updated.

Detroit Gives Raises to City Officials As Vote Nears to Cut Worker Pensions

Detroit’s high-profile bankruptcy has filled the front pages of newspapers across the country, and it seems the new twists just keep coming in this drama. In one corner, public employees and retirees are getting ready to vote on a measure that would cut their paychecks and pensions in unprecedented ways.

In the other corner, Detroit’s Emergency Manager Kevyn Orr is drawing flak for awarding raises to many city officials, including the mayor, city council members, and some non-union city workers:

Effective July 1, they all get 5 percent raises. Before the raise, Mayor Mike Duggan earned $158,000 a year, and Detroit’s nine at-large council members made $73,181 each, along with a pension, cell phone, city car and city-paid gasoline.

By comparison, the median household income in Detroit was $25,193 in 2011, according to the U.S. Census Bureau. Orr’s own salary of $275,000 a year to guide Detroit through the largest municipal bankruptcy case in history will not change.

“We’re still in the middle of bankruptcy, we still don’t know what the cost is going to be, and it seems like the attorney fees, right now, have gone up to $75 million,” [Wayne County Executive Robert] Ficano said live on WWJ 950 Wednesday morning.

Orr’s office says the costs for the increases are covered in the city’s restructuring plan, which is pending in federal bankruptcy court. Later this month, some of those same workers will see larger paycheck deductions earmarked for increased pension contributions. Deductions of 4 percent to 8 percent will begin July 14 to help fund pensions.

Back to the vote: the stakes are high for both the city and its workers. If workers and retirees vote “yes” on the measure, they’ll be giving up big chunks of their paychecks and benefits. If they vote “no”, they’ll likely have to settle for a far worse deal:

Hundreds of millions of dollars in pledged foundation and state money to spare deeper cuts from pensions and to save the city’s art collection depends on approval of the city’s plan by workers and retirees. If they vote against it, the pledged donations vanish. This may be the proponents’ most convincing argument: Vote for the city’s deal, or cuts — as much as 4.5 percent from some retirees’ pensions as well as smaller than expected cost-of-living increases — will get far worse.

If they go along with the deal, retirees and workers would also agree to give up lawsuits challenging cuts to their pensions. Though a federal judge here has made it clear that he believes pensions may be cut in bankruptcy, the Michigan Constitution includes protections, and opponents of the city’s plan say they cannot believe their colleagues would even consider ceding legal challenges.

Meanwhile, another struggling Michigan city, Flint, is considering following in Detroit’s footsteps by declaring bankruptcy. Flint is attempting to cut its retirees’ benefits to improve its financial position. But the legality of that move is dubious and will be decided by a judge soon.

Flint once had 200,000 residents has seen a dramatic drop in population over the past several decades. The birthplace of General Motors (NYSE: GM) has lost many factory jobs and abandonment of properties.

Last year, Detroit became the largest municipality in the U.S to enter Chapter 9 bankruptcy. Flint is about an hour away and if the judge rules against the city’s effort to cut its retiree health care benefits, the city is expected to file for bankruptcy. Flint will join dozens of cities and counties that have sought help from courts to modify their retiree benefit system.

“If we don’t get any relief in the courts … we are headed over the same cliff as Detroit,” said Darnell Earley, the emergency manager of Flint’s finances. “We can’t even sustain the budget we have if we have to put more money into health care for city workers.”

Photo Credit: University of Michigan via Flickr Creative Commons License

The Politics Behind Pennsylvania’s Pension Wrangling

When Pension360 last reported on news out of Pennsylvania, its governor was refusing to sign the state’s budget by the July 1^st deadline unless lawmakers passed major pension reform.

The July 1^st deadline has come and gone, and no reform measures have emerged from the legislature. But Gov. Tom Corbett made his move yesterday—signing the budget but forcefully wielding his line item veto power. The strategy: cut vital spending from the budget in an attempt draw lawmakers away from their summer vacations and back to the capitol:

Overall, Corbett struck $65 million from the Legislature’s own appropriations and another $7.2 million in earmarks and other spending items picked by lawmakers, noting that the proposal sent to him last week increased the General Assembly’s own $320 million budget by 2 percent.

“They filled the budget with discretionary spending and then refused to deal with the biggest fiscal challenge facing Pennsylvania, our unsustainable public pension system,” Corbett told reporters.

Overall, the $29 billion budget Corbett signed Thursday does not increase state taxes while authorizing $871 million in new spending, largely for public schools, prisons, pension obligations, health care for the poor and social safety-net programs.

To plug the deficit, it relies on more than $2.5 billion in one-time stopgaps, the biggest use of stopgaps outside of the three years around the Great Recession.

The main appropriations bill passed without a single vote from a Democrat.

Lawmakers made no immediate indication of how they would respond to the line-item vetoes, or whether they would move up planned return dates of Aug. 4 for the House and Sept. 15 for the Senate.

There are two reasons Gov. Corbett is choosing to take a stand now. I’ve already mentioned the first one: lawmakers leave for the summer after the budget is passed and don’t return until as late as September 15. Corbett wants to get them back to the capitol to pass pension reform.

But the second reason is this: Gov. Corbett is facing an upcoming election—and he’s currently trailing in polls behind his Democratic challenger, Tom Wolf.

So if some of this feels like campaign theater, it’s because it probably is. In fact, the political calculus behind Corbett’s recent decisions is one of the more fascinating aspects of this story.

Consider that Corbett could have vetoed the budget entirely, a move that would certainly rile lawmakers and get them back from their summer vacations. But the move would have riled the electorate, too:

A full veto would affect many stakeholders, though most employees would get paid. It potentially could delay money for groups receiving millions of dollars from the state, particularly social services such as day care providers hit hard in 2009 during a 101-day budget impasse under ex-Gov. Ed Rendell.

Corbett wants to be seen as taking a stand to save the state’s finances, not sabotage them. Line item vetoes are a less reckless way of accomplishing that goal.

Political maneuvering aside, Corbett has a point. Pennsylvania’s pension system, as is true in many states, is a fiscal hazard that will only get worse as time goes on:

If lawmakers don’t find a solution to what Corbett calls a pension crisis, costs will steadily rise for taxpayers. Pennsylvania will raise payments into the state’s pension systems by $600 million in the new budget year. The state has $47 billion in unfunded liability in pension obligations.

If you asked Corbett about his line item vetoes, he would probably tell you that, in fact, deep cuts to social services spending will be the new norm if lawmakers can’t get pension costs under control.

Corbett’s actions are making him enemies with lawmakers on both sides of the aisle:

[Democrats accused] Corbett of lacking leadership skills and mishandling the state’s finances while pursuing school funding cuts that they say accelerated school property tax hikes.

“Tom Corbett made this mess,” House Minority Leader Frank Dermody, D-Allegheny, said. “He owns it.”

Republicans stressed that they had worked hard to pass a pension overhaul.

House Majority Leader Mike Turzai, R-Allegheny, said the leading pension bill was hatched by House Republicans, not Corbett, while the Senate’s four top Republicans suggested Corbett had been reckless.

“The state budget process is not a game to be played and vital government programs should never be placed in jeopardy,” they said in a statement.

Pension360 will keep you updated on this story as it plays out over the next few weeks.

Photo by Chesapeake Bay Program via Flickr CC

An Update On Pension Obligation Bonds [Center for Retirement Research]

The Center For Retirement Research has released a new brief on the state of Pension Obligation Bonds (POB) – the debt vehicle used by many state and local governments to cover their pension contributions. The report reveals that POB’s do provide the budget relief governments are looking for. But that relief doesn’t come with its downsides.

From the brief:

The brief’s key findings are:

Some state and local governments issue Pension Obligation Bonds (POBs) to cover their required pension contributions.

POBs offer budget relief and potential cost savings, but also carry significant risk.

POBs had anegative average real return from 1992-2009, but show a small gain when the time period is extended to 2014.

POBs could be a useful tool for fiscally sound governments or as part of a broader pension reform package for fiscally stressed governments.

But results to date suggest that, instead, POBs tend to be issued by governments under financial pressure who have little control over the timing.

Read the whole report here:

http://crr.bc.edu/briefs/an-update-on-pension-obligation-bonds/

Report Provides New Look at Public Pension Debt, State-by-State

Robert Sarvis and the Competitive Enterprise Institute have released a new report on public pension debt in the United States. The report draws from several estimates of pension debt and produces a list of states with the highest (and lowest) burdens of pension debt on their shoulders.

The report begins by laying out some of the reasons most states are shouldering massive pension debts:

One reason is legal. In many states, pension payments have stronger legal protections than other kinds of debt. This has made reform extremely difficult, as government employee unions can sue to block any scaling back of generous pension packages.

Then there is the politics. For years, government employee unions have effectively opposed efforts to control the costs of generous pension benefits. Meanwhile, politicians who rely on government unions for electoral support have been reluctant to pursue reform, as they find it much easier to pass the bill to future generations than to anger their union allies.

Another contributing factor has been math—or rather, bad math. For years, state governments have understated the underfunding of their pensions through the use of dubious accounting methods. This involves using a discount rate—the interest rate used to determine the present value of future cash flows—that is too high. This affects the valuation of liabilities and the level of governments’ contributions into their pension funds.

More on the ‘bad math’ portion of that argument:

In defined benefit plans, states are on the hook for payouts regardless of their pensions’ funding level. Therefore, the discount rate used in the valuation of pension liabilities should be a low-risk rate, because of the fixed nature of pension liabilities. Ideally, this should as low as the rate of return on 10- to 20-year Treasury bonds, which is in the 3 to 4 percent range.

However, in the U.S., most state and local governments use discount rates based on much higher investment return projections, usually of 7 to 8 percent a year. This usually leads to state and local governments making lower contributions, in the expectation of high investment returns making up for the gap. However, while such returns may be achievable at some times, they need to be achievable year-on-year in order for a pension fund to meet its payout obligations, which grow without interruption. Therefore, failing to achieve such high returns can result in pension underfunding that extends into the future. Discount rates based on high return projections also incentivize pension fund managers to seek higher returns. This encourages in-vesting in riskier assets, which incur large losses for investors when they go south.

For years, this practice was validated by the quasi-private Government Accounting Standards Board (GASB). To improve accounting, GASB recently introduced new standards that have pensions deemed underfunded—those with a funding level of under 80 percent—use a lower discount rate. However, pension plans deemed to be above 80 percent funded will still be able to use a high discount rate. Thus, the new GASB standards do not go nearly far enough to end the dubious accounting practices that have exacerbated state pension underfunding by hiding its extent.

Of course, these factors affect different states in different ways. Not all states use an 8 percent discount rate, although many do. That’s why the report breaks down which states are the worst off based. We won’t give away the results–but there are some surprises. Click the link below to check out the results of this interesting study.

Read the full report here.

Understanding Public Pension Debt: A State-by-State Comparison

A new report is out from the Competitive Enterprise Institute, authored by Robert Sarvis.

From the abstract:

State government pension debt burdens labor markets and worsens the business climate. To get a clear picture of the extent of this effect around the nation, this paper amalgamates several estimates of states’ pension debts and ranks them from best to worst.

Today, many states face budget crunches due to massive pension debts that have accumulated over the past two decades, often in the billions of dollars. There are several reasons for this.

One reason is legal. In many states, pension payments have stronger legal protections than other kinds of debt. This has made reform extremely difficult, as government employee unions can sue to block any scaling back of generous pension packages.

Then there is the politics. For years, government employee unions have effectively opposed efforts to control the costs of generous pension benefits. Meanwhile, politicians who rely on government unions for electoral support have been reluctant to pursue reform, as they find it much easier to pass the bill to future generations than to anger their union allies.

Another contributing factor has been math—or rather, bad math. For years, state governments have understated the underfunding of their pensions through the use of dubious accounting methods. This involves using a discount rate—the interest rate used to determine the present value of future cash flows—that is too high. This affects the valuation of liabilities and the level of governments’ contributions into their pension funds.

Read the full report here:

http://cei.org/sites/default/file/Robert%20Sarvis%20-%20Understanding%20Public%20Pension%20Debt.pdf

The GOP Is Floating A Pension Tweak to Fix the Highway Trust Fund – Is It A Good Plan?

We’re used to hearing news of pension wrangling coming from politicians on the state and local level–but today, we get some rare news of a pension debate happening in the United States House of Representatives.

First, some context: The Highway Trust Fund is going to run out of money sometime in August. It is funded by gas tax revenues, but that money has proved insufficient in the face of increased transportation spending.

Courtesy of the Department of Transportation

The Fund is a fairly important one: it is the source for federal spending on highways, roads, bridges and transit. So its insolvency, in short, is problematic. Democrats have previously proposed raising taxes to infuse the Fund with some extra cash. But Republicans have stood in staunch opposition to that method, and they’ve just recently come out with a plan of their own (and it involves pensions):

The proposal, which would be financed in several unusual ways, is expected to generate about $10 billion to keep the Highway Trust Fund from becoming insolvent on Aug. 1 and to pay for projects the fund does not cover. The committee will begin work on the bill Thursday.

The plan would be financed through a financial maneuver known as pension smoothing, which increases tax revenues by allowing companies to delay tax-deductible pension contributions, and by unspecified user fees. Money would also be transferred from a fund that is used to clean up leaky underground storage tanks.

In other words:

Essentially the GOP will allow private firms with retirement plans to contribute less to them next year. That will bolster firms’ profits and, therefore, increase tax collections. In other words Congress will violate its own standards, put into law to protect pensions with sensible accounting, for a short term revenue boost.

The plan would generate about $10 billion and would buy Congress more time to figure out a long-term fix to the HTF’s solvency woes. But it doesn’t come without its drawbacks, as Steve Malanga explains:

None of this is free, of course. Aside from the dangerous trend of allowing private firms to purposely underfund their pensions, the plan boosts federal revenues today at the cost of increasing the deficit over the long term.
Given this proposal, you would think that everything is just peachy with funding of private sector pensions in America. But The Pension Benefit Guaranty Corporation, which is responsible for insuring private pensions, just put out a report estimating it’s on an eight-year path to insolvency itself.
The nation’s laws dictating private sector pension standards were enacted to protect retirement plans. But Congress, in its endless quest for more revenues, can’t even live by the standards that it imposed on companies.

Mr. Malanga presents this chart:

Congress appears to be in a major conundrum–do they fund the HTF now at the expense of the future? Do they leave the Fund empty, and put many major infrastructure projects on hold? Or do they come up with another solution? The third option is simultaneously the most logical and the least likely. Stay tuned.

CalPERS Sends Message to Cities: Pay Up

In 2012, the city of San Bernardino, California made an unprecedented move: bankrupt and financially handcuffed, the town defied pension juggernaut CalPERS and simply stopped paying its contributions to the system. It has since resumed making those payments, but the fight is far from over. Now, CalPERS wants the city to pay back the payments it missed:

At issue is the $17 million in back payments and penalties that San Bernardino failed to make between declaring bankruptcy in August 2012 and resuming payments in July. Calpers has maintained that it is owed in full. But now in bankruptcy negotiations, the city is hoping to pay only a fraction of that, arguing that the city’s creditors must all share in the bankruptcy pain. The amount may be small, given the system’s assets, but if San Bernardino gets a reduction, the precedent could be huge, opening the door to other struggling municipalities using bankruptcy law to justify delaying or withholding payments to the pension system.

“This city has taken on the 800-pound gorilla, which is Calpers,” said Ron Oliner, a lawyer for the San Bernardino Police Officers Association, which represents the city’s uniformed officers. “Everyone in California is watching San Bernardino, and everybody in the nation is watching California.”

Calpers has for many years resisted all efforts to allow cities, for whatever reason, to stop making their required payments. (Federal law allows bankrupt companies to slow them greatly.) While agreeing that “significant progress has been made in the mediation,” Rosanna Westmoreland, external communications manager for Calpers, said the pension system’s hands were largely tied by statutes mandating that all the pension system’s participants make their full contributions on time and that no workers’ benefits be reduced. “It is the law,” she said.

The problem is that it remains unclear whether, in cases like this, federal bankruptcy law trumps state pension laws. A federal judge hearing the Detroit bankruptcy case ruled, for instance, that federal laws took precedence in that case, so the benefits of city workers in Detroit could be reduced in defiance of state law. But Calpers has insisted that this does not apply to the situation in California, an assertion that may be tested in court, if the mediation provides no solution.

Even before a recent wave of municipal bankruptcies hit California, the California Public Employees’ Retirement System, known as Calpers, had also insisted that under state law, no local government or public agency could reduce the benefits of current workers or retirees.

Cutting pension costs have proved difficult in California. That’s due to the so-called “California Rule”, which prohibits the rollback of pension benefits, even on a go-forward basis. Economist Sasha Volokh explains:

Most states are free to alter public employee pensions, as long as they do so on a purely prospective basis. For instance, a state can reduce cost-of-living adjustments (COLAs), say from 3% to 2%, as long as the amount accrued so far is still subject to the old COLA. But the rule is otherwise in California: California courts have held that ‘upon acceptance of public employment [one] acquire[s] a vested right to a pension based on the system then in effect.
In California, when a public employee begins work, he not only acquires a right to the pension accumulated so far—presumably zero on the first day, and increasing as he works longer—but also the right to continue to earn a pension on terms that are at least as generous as the ones then in effect, for as long as he works. And if pension rules become more generous in the future, then those more generous terms are the ones that are protected. Any changes to these rules must be reasonable, meaning that they ‘must bear some material relation to the theory of a pension system and its successful operation,’ and any disadvantages to the employees ‘should be accompanied by comparable new advantages.’ This is the ‘California rule.

Cities have tried to roll back their pension obligations. San Jose was one such city; earlier this year, it passed a plan forcing employees to pay more towards pensions. But the courts responded with a resounding “you can’t do that”. Volokh, for one, doesn’t like the economics behind that ruling.

When pensions are given special protection that’s unavailable for other job characteristics, the mix of wages and pensions is distorted relative to what it would otherwise be (given collective bargaining, tax policy, employee time and risk preferences, and other factors). If market or fiscal pressures mean government compensation must become less generous, it’s salaries and other benefits that must take the hit, even if some employees would prefer to take some of the blow in terms of decreased pension benefits. Those with shorter life expectancies — men, the less-educated, the poor, minorities, and those in bad health — suffer the most from policies that protect pensions at the expense of current salaries. Some of the pain will also fall on taxpayers, and some of that pain may result in trimming state government services (e.g., police, fire, garbage collection, DMV, schools). The California rule thus makes reductions in government compensation either more painful for employees or more expensive to taxpayers than they would be if pension terms could adjust together with salaries and other benefits.

Anyhow, CalPERS is setting a precedent with its action towards San Bernardino. It’s a precedent that indicates, bankrupt or not, cities still owe CalPERS its money.

Photo by Pete Zarria via Flickr CC

Alaska Prepares, Municipalities Brace for $3 Billion Pension Contribution

Most of the news coming out about pension contributions lately has centered on states who aren’t paying enough. But this news item is different–this is about a state going above and beyond the call of duty to try and fund its struggling pension system. That state is Alaska:

Moving to preserve the state’s top credit ratings, Republican Governor Sean Parnell signed legislation last month that takes the unprecedented step of tapping Alaska’s budget-reserve account to pay unfunded pension liabilities. It will pull $3 billion from the pool to reduce a $12 billion gap.
Home to the nation’s third-largest onshore oil reserve, Alaska gets 90 percent of its operating budget from crude-production taxes and royalties. It’s been saving oil proceeds for decades for when the wells run dry. Alaska is just one of nine states with top scores from Moody’s Investors Service and Standard & Poor’s, and it’s seen how pension deficits have hurt the credit standing of states such as New Jersey and Illinois.
“A year ago when I went to New York City and spoke with the rating agencies to make sure that we maintained our AAA financial credit rating on our bonds, they identified our unfunded pension liability as the single biggest risk,” Parnell said during a signing of the bill June 23 in Juneau.

In all, Alaska will put $1 billion in its PERS fund and $2 billion in its TRS fund. The system, which sports a funding ratio of just under 60 percent, is one of the unhealthiest in the United States.

It’s already figuring out where to put the PERS money. According to Pensions & Investments, $400 million will go to international managers, $200 million to a State Street Advisors Russell 1000 Index Fund, and a combined $400 million will go to fixed-income investments.

Alaska’s money-shifting is just one change to the state’s pension landscape. The other: a recently implemented law that extends the amortization period to 2039 and requires future contributions to be calculated based on level pay amortization. The goal: to boost the funding levels of PERS and TRS to 68.8% and 73.3%, respectively. But state municipalities don’t quite share that vision, mostly, they say, because much of the cost will fall to them.

Extending the amortization period, the time over which that debt would be paid, is comparable to the difference between a 15-year and a 30-year mortgage, [Alaska Retirement Management Board member] Kris Erchinger said. Essentially, the longer period allows lower monthly payments, but at a much greater total cost.
“It’s a better deal for the folks who have to balance the budget today because they have to pay less today,” she said.
“But projections of decline in oil production — oil revenues — does not bode well for our ability to pay those costs in the future,” Erchinger said.
While retirement board member Martin Pihl of Ketchikan joined Erchinger and others in praising the $3 billion, he doesn’t like the Legislature’s cost shift.
“I do have deep regret over what I feel is the unnecessary extension of the amortization period, bringing huge, huge, additional cost — like more than $2.5 billion to the people across Alaska — and forcing even greater numbers into state budgets down the line,” Pihl said.

That increased cost for municipalities stems from a 2005 deal in which state and local government officials negotiated a way to pay off the unfunded liability. It called for municipalities to pay an extra 22 percent of their payroll toward the back debt until it is paid off. Extending the amortization term by nine or 10 years increases the cities’ share while reducing the state’s share of that cost.

…

Board member Sam Trivette of Juneau said the level-percent-of-pay method adopted by the Legislature will result in less money going into the retirement trust funds initially, weakening them and driving up costs in the long run.
“That’s why we supported level-dollar,” he said. “A shorter amortization period saves everybody billions of dollars.”

Alaska’s oil revenues have allowed it to keep two rainy-day funds stocked with cash. The plan was always to use the funds to cover revenue shortfalls in years when oil prices drop, and to provide payouts to residents. But using the money for paying down pension obligations is a first:

One [rainy-day fund] is the $52.7 billion Alaska Permanent Fund, created in 1976 as the trans-Alaska pipeline neared completion. The pool was established to accumulate and invest oil-tax and royalty money in case the state runs out of crude and to give residents annual dividends. The payout was $900 in 2013 for every man, woman and child who met the residence requirement.

The second fund, the $12.7 billion Constitutional Budget Reserve, was created in 1990 as a rainy-day fund. Initially seeded with settlements from tax and royalty disputes with oil companies, the reserve plugs budget holes in years when oil prices drop and is supposed to be replenished in surplus years.
“Having an oil trust fund like that is unique,” said Keith Brainard, research director for the Lexington, Kentucky-based National Association of State Retirement Administrators. “I am not aware of a state that has dipped into reserve like this, at least in a substantial way like this, to pay down an unfunded liability.”

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Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712