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HomeMy WebLinkAboutRes2014-004 Sponsored by: Hunt it CITY OF SEWARD, ALASKA RESOLUTION 2014-004 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SEWARD, ALASKA, EXPRESSING STRONG SUPPORT FOR GOVERNOR PARNELL'S PROPOSAL TO APPROPRIATE $3 BILLION FROM THE CONSTITUTIONAL BUDGET RESERVE DIRECTLY INTO THE ALASKA RETIREMENT TRUST FUNDS IN 2015 WHEREAS, the combined unfunded liability of Alaska's Public Employee's Retirement System (PERS) and Teacher's Retirement System (TRS) is $1 1.8 Billion at June 30, 2012; and WHEREAS, the funded ratio of PERS is 61.3% and TRS is 52.1% at June 30, 2012; and WHEREAS, the Governor has identified the State's unfunded pension liability as Alaska's biggest budget driver, with annual State Assistance payments expected to exceed $1 Billion per year without a substantial cash infusion directly into the retirement trust funds; and WHEREAS, State Assistance payments on behalf of municipalities provide significant rate relief to local taxpayers, provide budget predictability, affordability, and stability to local 1.• governments, and are crucial to the financial health of Alaska's municipalities and school districts; and WHEREAS, Governor Parnell's plan is in the best interests of the retirement systems, the State of Alaska and its municipalities by honoring Alaska's constitutional obligations. reducing annual state assistance contributions to a more predictable and sustainable $500 Million per year, increasing the funded status of the PERS and TRS by 10%, honoring the State's previous commitment to pay employer contribution rates in excess of 22%, allowing for future interest earnings to offset future contribution requirements, reducing pressure on future State and local government budgets, strengthening the credit rating of the State of Alaska and its municipalities, increasing future flexibility at a time when oil production is anticipated to decline, and solving the problem now when reserves are available rather than passing the problem to future generations of Alaskans. NOW THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF SEWARD, ALASKA, that: iY�.. ........0........ CITY OF SEWARD, ALASKA RESOLUTION 2014-004 j Section 1. The City Council of the City of Seward expresses strong support for Governor Parnell's proposed transfer of$3 Billion from the State's Constitutional Budget Reserve directly into the retirement trust funds. Section 2. The City Council expresses concern for any proposal to place the proposed $3 Billion into a Reserve Fund rather than directly into the retirement trust funds. The purpose of a Reserve Fund is to provide future flexibility to allow monies to be used for purposes other than the provision of pension benefits. The existence of the Reserve Fund gives a potentially false assurance that funded levels of the retirement trust funds are adequate to pay pension benefits, thereby reducing required employer contributions into the system. Future tapping of the Reserve Fund however, would significantly exacerbate the unfunded liability at a time when Alaska has diminished flexibility to address the problem due to lower oil production and likely lower reserves. Section 3. The City Council further expresses strong support for the Governor's proposal to continue to provide $500 Million per year in State Assistance payments on behalf of municipalities and school districts. State Assistance payments should not be further diminished. Any further reduction in State Assistance necessarily extends the amortization of the unfunded liability resulting in local governments and school districts having to pay the 22% (PERS) and 12.56% (TRS) employer contribution rate for many more years than they otherwise would, and significantly shifting costs from the State to its municipalities. j Section 4. This resolution shall take effect immediately upon adoption. PASSED AND APPROVED by the City Council of the City of Seward, Alaska, this 13th day of January, 2014. THE CITY OF SEWARD, ALASKA Pean-4°/)v 42442.,0e, Bardarson, Mayor j CITY OF SEWARD, ALASKA RESOLUTION 2014-004 i` AYES: Keil, Terry, Squires, Butts, Bardarson NOES: None ABSENT: Casagranda, Shafer ABSTAIN: None ATTEST: w:. , 1/4 Jo anna Kin CMC Ci y Clerk (City Seal) sEkv.47 • O • •` SEAL • ^-®- %,.31)",1;.*° '•....�.:•9'��G�'ens F O F •/../10 S..Y Y,� COUNCIL AGENDA STATEMENT e4c"tw9 Meeting Date: January 13, 2014 % + it5KP From: James Hunt, City Manager Agenda Item: Support for Governor Parnell's proposal to appropriate $3 Billion directly into Alaska retirement trust funds BACKGROUND &JUSTIFICATION: The City of Seward is a participant in the public employee's retirement system (PERS) managed by the State of Alaska. The combined unfunded liability of the PERS and the Teacher's Retirement System (hereinafter jointly referred to as the "System") is $11.8 Billion at June 30, 2012. The funding ratio of the PERS system is 61.3% and the TRS system is 52.1%, at June 30, 2012. Alaska Statute currently requires that the State of Alaska pay not only its contributions as an employer to the PERS retirement system, but also the amount by which the employer contribution rate exceeds 22%. This amount is known as "State Assistance", and is paid on behalf of other employers in the system (including the City of Seward), in an effort to reduce the impact of growing retirement system contributions on local governments and local taxpayers, and to provide budget predictability, affordability, and stability. From 2009 through the first half of 2013, the State of Alaska contributed $2,215,820 into the Public Employee's Retirement System on behalf of the City of Seward. Governor Sean Parnell has proposed in his 2015 budget, a $3 billion transfer from the Constitutional Budget Reserve directly into the Alaska Retirement Trust Funds. The Governor's proposal also proposes to cap the State Assistance payments going forward, at $500 million per year. This will provide needed rate relief to the State budget in a time of diminishing oil production, will honor the State's previous commitment to assist local governments, will increase the funded ratio of the PERS and TRS by approximately 10% immediately, and is expected to strengthen the State's credit rating. The additional interest earnings from the $3 billion will result in lower required State contributions into the retirement system in the future. One significant potential risk associated with this proposal is if the legislature decides to move the $3 billion contribution not directly into the retirement systems, but into a reserve fund. The reserve fund concept is intended to provide added flexibility to the State in the future; should the State need the monies for a different purpose, the legislature can tap the reserve for purposes other than funding retirement system pensions and benefits. This is a significant risk to the solvency of the retirement system because it gives a false assurance that there will be sufficient future funding in the systems to pay pension benefits, thereby reducing current contribution levels and potentially requiring significant injections into the system in the future, when the State is unlikely to be in a position to afford them. Therefore, the City should be vigilant in its opposition to any proposal to place the $3 billion into a reserve fund rather than directly into the retirement system. Further, it is important to note that this proposal will result in higher costs to local governments, including the City of Seward, when compared with the status quo. Under the status quo, the System is expected to be fully funded by 2031, meaning that after that time, the City will no longer be required to pay 22% of covered payroll into the retirement system; rather, it will pay only the normal cost(estimated at around 6%). Under Governor Parnell's proposal, the City will be required to contribute the 22% rate into the retirement system until 2036 (an additional five years, at an approximate additional cost to the City of$3.9 million). This proposal also assumes that current actuarial assumptions regarding investment earnings assumption, benefit levels, etc. are accurate, and to the extent that they are inaccurate and result in increased unfunded liability, the City's costs will be even higher. The trade-off here is that the status quo is unsustainable to the State of Alaska and its operating budget. Without some type of plan to reduce the State's annual State Assistance payments on behalf of local governments, we run the risk of further State cuts to local governments such as State Revenue Sharing, grant funding for capital and infrastructure, an increase in the required employer contribution rate above 22%, etc. CONSISTENCY CHECKLIST: Yes No N/A 1, Comprehensive Plan(document source here): X 2. Strategic Plan(document source here): X 3. Other(list): X FISCAL NOTE: Support for the Governor's proposal is expected to cost the City of Seward at least $3.9 million in added contributions toward the PERS unfunded liability, as the amortization period for the liability is extended by five additional years. To the extent that additional unfunded liability is created (actuarial assumptions are wrong and create additional liability), the City's costs will be even higher. Approved by Finance Department ,4 - ..) ATTORNEY REVIEW: Yes No X RECOMMENDATION: zo i4 - 004 Council approve Resolution 20+5- expressing strong support for Governor Pamell's proposal to appropriate $3 billion from the Constitutional Budget Reserve directly into the Alaska Retirement Trust funds in 2015.