by Rep. John Harris & Rep. Bruce Weyhrauch
February 27, 2006
Unfortunately, we find ourselves in a situation where the amount we are obligated to pay out annually to fund member's retirement and medical benefits is bigger than the amount being contributed. This has resulted in an unfunded liability and a political hot potato. A number of factors have contributed to the current liability: the 9/11 market crash, poor investment returns, rising health care costs, bad information concerning the amount the state should contribute to retirement systems, and over-generous actions of past legislatures and administrations. The result is an unfunded liability of $6 billion that will grow to a $20 billion unfunded liability within the next decade if left alone.
A number of you, no doubt, wonder why this is an important issue, and why the Legislature continues to put such emphasis on solving this problem. It is absolutely necessary that we deal with the current unfunded liability because, rest assured, it will continue to grow if we do not address it. Think of the problem as having a huge credit card debt you don't pay off, but you continue you to use the credit card.
Because our financial commitment to PERS/TRS is a constitutional requirement, the state will be on the hook for this debt until it is paid. If it continues to grow, we will continue to be required to fund it and monies will be redirected from other state programs. Education, Medicaid, roads, health care, criminal justice, and other programs will all suffer. But, this is not only a state issue. Every school district and local municipality in the state has members involved in the PERS/TRS system. As a result, the health of this system has a direct impact on communities throughout Alaska.
The House of Representative's Ways and Means Committee continues to hold hearings to determine the best way to deal with this problem and consider options to address the unfunded liability. In a time of surplus, an obvious option would be a direct appropriation. From a fiscal management perspective, making cash payment to pay the debt makes sense. However, there are numerous opponents to this choice, because in a time of surplus, they would prefer to spend the money on capital projects, increased education programs, or in other savings accounts.
Fixing the unfunded liability by purchasing pension bonds is another alternative. This would allow the state to purchase bonds at a lower interest rate than the current debt of the unfunded liability. This is a good option assuming that the interest rates stay the same - which we can never rely on and which makes this a much riskier choice than a straight forward appropriation.
The best option would be to adopt the Percent of Market Value (POMV) method for calculating the amount available for distribution from the Permanent Fund. By adopting the POMV, we guarantee every Alaskan a permanent fund dividend check and a recurring source of income for the state, including a consistent source of funding for PERS and TRS.
The final option is to simply do nothing. It is our hope that this option will not prevail. To do nothing will simply forestall the inevitable and ensure that future Alaskans and future Legislators will find themselves in an even worse predicament.
We will continue to seek out your input and implement the best practical solution to the PERS/TRS unfunded liability problem while looking after the best interests of Alaskans.
About: As members of the 24th Alaska State Legislature, John Harris (R) represents House District 12 (Valdez) and serves as House Speaker and Bruce Weyhrauch (R) represents House District 4 (Juneau) and serves as Chairman of the House Ways & Means Committee.
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