Dunleavy plan to cut $65 million puts state retirement systems at long-term risk

Here is the latest bad idea from Gov. Mike Dunleavy and Co.

Falsely claiming to have found a painless and risk-free budget cut, the governor and Revenue Commissioner Lucinda Mahoney want to reduce the annual payments made by the state to fund public employee pensions. They would start by cutting $65 million this year, with a total of $3 billion in reduced contributions between now and 2039.

What gives?

It’s the latest edition of the Dunleavy fiscal fantasy, the Dream State.

The working premise is that the stock market has done so well in the past year that the retirement systems will forever be financially stronger. The 28 percent gain in assets should be baked into the system to serve as the foundation for uninterrupted future growth in the decades ahead.

This would be a change from past practice in which the size of the foundation is not the value at the end of a specific fiscal year with record growth, but a long-term average that acknowledges the yearly fluctuations in market value.

In addition to regarding recent gains as permanent, the pension plans can expect to earn 7.38 percent a year, every year with no downturns, according to Dunleavy and Mahoney.

Missing from the Dunleavy and Mahoney fantasy is the likelihood that future economic recessions and stock market corrections will erase some or all of the recent gains. Also missing from the Dunleavy/Mahoney plan is the likelihood that changes in federal tax policy could lead to lower growth that 7.38 percent a year. Finally, Dunleavy and Mahoney are failing to account for what would happen if investment markets have three bad years in a row.

This is complex material. And you can count on the Dunleavy administration for trying to dumb down every complex issue faced by the state.

The systems gained 28 percent in the fiscal year that ended June 30, largely because of the stock market rally and the continuing impact of massive federal tax cuts approved in 2017, which boosted the deficit.

With a gain of $5.2 billion, the systems will require $3 billion less in future contributions between now and 2039, according to a report prepared by the state consultant. I don’t see anything on the report from Buck Consultants explaining the many reasons why these claims may not come to fruition.

Or whether the company is saying that the state would be prudent to follow this course. Buried in the fine print is a suggestion for readers to look in another document for the risk factors, where you can find page after page about why projections can always be wrong and the consultant isn’t responsible.

The tens of thousands of people who are relying on these systems deserve better than this.

What are the chances that the consultant, Dunleavy and Mahoney are correct?

It’s a safe bet that the consultant, Dunleavy and Mahoney won’t give an answer that you can take to the bank.

One thing for sure is that Dunleavy and Mahoney will not be around for the long term, because governors and revenue commissioners are always short-term employees who make decisions that can be judged as foolish or wise based on long-term results.

If you want to testify about this risky plan, the state retirement board meets Monday morning with testimony at 9 a.m. Here is the call-in information.

The Alaska Municipal League, showing great restraint, called the Dunleavy/Mahoney plan one that “goes against best practice.”

By using the positive performance of a single year to reset long-term expectations, the state would be taking an enormous risk, passing that along to some future governor and Legislature. The Alaska Retirement Management Board and the beneficiaries shouldn’t “bear the risk from an unnecessary change,” AML said.

The ARM board can do all Alaskans a favor by killing the Dunleavy/Mahoney Dream State Monday.

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