Alaska shouldn’t risk going back to defined-benefit retirement
If you’re a kind-hearted Alaskan who thinks lawmakers are there to protect your interests and are far above pandering to special interests to scare votes in the next election, House Bill 55 could be a disappointment.
According to its sponsors’ summary, the measure would create a new hybrid retirement plan option for state and municipal law enforcement officers and firefighters under the Alaska Public Employees Retirement System (PERS) with new protections for the state against unforeseen future liabilities.
If we want to recruit and retain first responders, why not pay them more, improve their working conditions and make their life and work a little easier. We might even – gasp! — consider fully staffing agencies to reduce work-related stress. There is, after all, debate about the role of pension plans in recruitment or retention.
Does Alaska really need to open a risky and potentially ruinous retirement plan for first responders? Unlikely, and a cynic could be forgiven for seeing HB 55 as a first step in bringing the state’s workforce back to its struggling old retirement system, shut down years ago.
HB 55 galloped through the Alaska House 25-15 last year, largely along party lines, but with six Republicans joining Democrats in voting for passage. In the Senate this month, the legislation was kicked out of the Labor and Commerce Committee chaired by Republican Senator Mia Costello. She had legitimately been hesitant to move the bill forward due to concerns about financial risks to the state.
The bill is sponsored in the Senate by Anchorage Democratic Sens. Tom Begich, Elvi Gray-Jackson and Bill Wielechowski. He’s got the love of all the usual suspects, including gubernatorial hopeful Bill Walker, Republican and Independent, Undeclared and Independent.
The measure would create a new “defined benefit” pension fund for first responders. The old pension scheme, severely underfunded when it closed to new hires in 2006, still covers 26,000 workers. It has been replaced by a “defined contribution” 401(k) retirement system. This system now covers approximately 11,000 state employees.
Defined benefit plans are not new. They date back to the Revolutionary War and spread as the nation industrialized. Over the past 25 years, they have lost ground to defined contribution plans in the private sector because they are expensive and complex to manage. Across the country, state defined-benefit pension systems have been grossly underfunded and remain so. Nationally, systems are around 80% funded, according to Pew Trusts, a huge improvement over recent years. The four states whose traditional pension systems are experiencing the most financial difficulties are Illinois, Kentucky, Pennsylvania and New Jersey. As former State Senate Speaker Lyda Green pointed out in a recent op-ed, Sitka Republican Senator Bert Stedman, a supporter of the defined-contribution plan currently in place, warned a while ago. 17 years that underfunded retirement benefits in Alaska stemmed from “”multiples of the years of compound errors”, including inaccurate assumptions, a bear market, falling interest rates, artificially low contribution rates and legislation that increased benefits. Lawmakers in 2014 then endorsed the government. Sean Parnell’s plan to bolster the state’s retirement system by injecting $3 billion in state reserve funds to help pay off unfunded liabilities, which at one point stood at around $12 billion, and they agreed that the state should invest $500 million in the pension system every year, until the shortfall is made up. The scheme remained underfunded by about $4.6 billion last year.
With Alaska’s old plan, dating from 1961, still underfunded, we should be wary of stumbling down the same traditional retirement path – with its risks – that led Alaska into such a terrible fiscal mess in the over the past years. What are the state costs for the new HB 55 pension fund? Who really knows? PERS consulting actuary Buck Global estimates it could cost Alaska up to $7 million a year. Proponents say HB 55 minimizes risk to the state, but policy analyst Ryan Frost of the Reason Foundation’s Pension Integrity Project sees it differently. He says the bill “does far too little to prevent the increase in unfunded pension liabilities.”
In short, HB 55 only works as intended if Alaska PERS does something it has never done once in its entire history – “get 100% of its guesses 100% correct, 100% of the time”, has writes Frost.
All this as lawmakers tell Alaskans to prepare for new taxes because they are simply needed to make ends meet, and battles rage over the size, calculation and future of Permanent Fund dividends.
It is difficult to understand how any responsible legislator, given the history of traditional state pension systems in general, and that of Alaska in particular, could with a straight face choose to adopt such an expensive and risky — even for first responders — while urging Alaskans to prepare for taxes.
Paul Jenkins is a former Associated Press reporter, editor of Anchorage Times, editor of Voice of the Times and former editor of Anchorage Daily Planet.
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