PERS, TRS and state fiscal policy …

PERS TRS baseline v injection (9.6.2013)piece in the Alaska Dispatch Wednesday on PERS (the Public Employee Retirement System) and TRS (the Teacher Retirement System) caught my eye.  The piece seemed to disappear from the “front page” of the Dispatch relatively quickly, but is still available on the back pages.

With one exception the piece does a good job of laying out the problem the state is facing with PERS and TRS.  (The exception, of course, has to do with the Dispatch’s biased approach toward the oil tax issue which I have written about before on these pages and will spare repeating here).

As the Dispatch piece correctly notes, PERS/TRS rapidly is becoming a major issue as the state comes to grips with the escalating cost of playing catch up with past underfunding.  The issue is even more critical because the problem is emerging in the midst of an overall budget crunch.   I wrote about that intersection recently.

But the Dispatch piece, along with some recent testimony before the House Task Force on Sustainable Education helps make the contours of the issue even more clear.

A good starting point for understanding the scope of the issue are the materials used recently to brief the Alaska Retirement Management Board (“ARM Board”) at an “Unfunded Liability Work Session.”

One slide especially captures the scope of the issue.  That slide, repeated at the top of this piece (and available in blow up by clicking on it on this page) compares two approaches to resolving the issue.  The current approach is in blue and shows that resolving the PERS/TRS issue will require state funding levels in the range of $1 billion per year starting next fiscal year and basically continuing at that level through the end of the next decade.

That is a substantial increase over the levels projected even as recently as 18-months ago as part of the Governor’s FY 2013 budget.  There, the Administration projected that the payments toward PERS/TRS would be as follows: FY 2013:  $610 million; FY 2014:  $638 million; FY 2015:  $728 million; FY 2016:  $788 million; FY 2017:  $790 million; FY 2018:  $793 million; FY 2019:  $815 million; FY 2020:  $840 million; FY 2021:  $868 million; FY 2022:  $899 million.

Now, on average the projections are roughly $250 million higher each year.

Focus for a moment on what that means.  At that level, PERS/TRS funding alone will consume, on average, somewhere in the neighborhood of 15 percent of the entire — capital and operating — state general fund budget (at sustainable levels) every year over the next two decades.  If the state doesn’t adopt a sustainable budget model, PERS/TRS will consume an even greater percentage of the remaining budget in the second half of the period, as state oil revenues, under either ACES or SB 21, continue their projected decline.

The second set of bars on the slide, in red, is an alternative approach now being pushed by the ARM Board, which involves injecting an additional $2 billion into the fund over the next four years by adding a supplemental $500 million each year to the amount already otherwise due.   Viewed from the Board’s perspective, that results in increasing spending on PERS/TRS  to levels at or above $1.5 billion per year in fiscal years 2015 – 2017, but reducing spending in subsequent years to significantly lower levels.

From an overall state perspective, however, that “reduction” likely is ephemeral (in other words, “smoke and mirrors”).

The Board produces that result essentially by transferring (i.e., dedicating) $2 billion out of the Statutory Budget Reserve (SBR) and Constitutional Budget Reserve (CBR) to the PERS/TRS account, resulting in a loss in revenue to the state General Fund from the earnings off those accounts.  Unless you assume that the ARM Board will be able to earn more on those assets than the assets otherwise are capable of earning if held in the SBR and CBR, there really is no savings to the state as a whole, but instead simply a transfer in funds (and associated earnings) from one state account to another.

Another, more interesting — and far more fundamental — alternative is suggested by some comments made by David Teal, the Director of the Legislative Finance Division, at last week’s hearings before the House Task Force on Sustainable Education.  There, Mr. Teal appeared to indicate that the state currently is overfunding the PERS/TRS paydown, as I understood it at the rate of around $300 million per year.  (Teal’s presentation is available here, beginning at 71:50.  The PERS/TRS discussion occurs at several points during the discussion, but there is an extended discussion of the potential overfunding starting at 140:45.)

To this point I am not entirely sure the overfunding, if that is indeed what has occurred, has been a bad thing.  To the extent the PERS/TRS paydown is being overfunded, in one sense it is currently being used as a state savings account, similar to the SBR, CBR and Permanent Fund.   Given that the state has been spending at grossly excessive levels over the past few years, the fact that some of that “overspending” in fact has been a disguised contribution toward savings probably is useful.

But as the state moves toward a sustainable budget — which it must do if future generations of Alaskans are to be treated equitably with this one — the required level of savings will occur more transparently.  Revenues above the sustainable spending level will be put directly in savings, with the intent that the amounts remaining are actually spent on government goods and services.  As a result, less transparent savings, such as overfunding PERS/TRS, will no longer be useful and, in fact, will be counterproductive.

All of this leaves me at the current time with the following thoughts:

  1. PERS/TRS clearly is a serious problem confronting the state.  It has to be factored in when addressing any issue involving state spending.
  2. In the context of a sustainable budget, the current approach — represented by the blue bars on the graph — probably is the best.   It treats both the current generation and the next relatively equally, by requiring each to provide funding to resolve the problem at roughly constant levels.
  3. With all due respect, while understandable from their perspective the ARM Board’s proposed alternative approach strikes me as little more than smoke and mirrors from a larger, statewide perspective.  The transfer of funds that it contemplates just moves the problem from one pocket (the PERS/TRS accounts) to another — the state General Fund.  We need to address the real problem, not just move it around.
  4. Finally, we need to run David Teal’s view, that we potentially are overfunding the PERS/TRS paydown, to ground.  If that is the case, then we need either to recognize it for what it is (another form of savings) or, especially in the context of a sustainable budget, eliminate it in order to reduce PERS/TRS to its “true” cost going forward.  While the resulting amount of the PERS/TRS paydown will remain significant (in the range of 8 – 12 percent of total GF sustainable spending per year over the next two decades), it won’t be as overwhelming as currently appears to be the case.

My guess is some of this will start playing out in the Senate and House Finance subcommittee hearings over the Fall.  I am confident it will continue playing out in future hearings of the House Task Force on Sustainable Education.  Watch this space for ongoing discussion as it does.