A proposal to revamp the retirement system for Alaska’s state and local government employees is scheduled for debate in the state Senate on Wednesday. The bill would move Alaska’s public employees back to a pension system, and that would be a big change from the current 401(k)-style plan.
Alaska Public Media’s political reporter, Eric Stone, spoke with Alaska News Nightly host Casey Grove about the proposal.
This interview has been lightly edited for length and clarity.
Eric Stone: This is all about the retirement system for government employees – both state and local. If you work for an employer who participates in the Public Employees Retirement System, called PERS, or you’re a teacher with access to the Teachers Retirement System, called TRS, this bill would affect you.
Right now, most public employees in Alaska have a 401(k)-style retirement account. It’s what finance people call a “defined contribution” system. Basically, you and your employer put some money aside in an account, and it grows over time.
But the catch is that if the stock market crashes, you’re the one left holding the bag. You’re the one taking the risk. So, if you wanted to retire in 2008, or when markets dipped in 2018, you might have had to wait a little longer.
What this bill would do is move to a pension system. Instead of getting definite contributions from the employer – like the 401(k) system – what’s guaranteed is the level of benefits. It’s a defined benefit plan. And so instead of you taking the risk of a market downturn, or you making the wrong choices of investments, the state takes the risk.
It’s meant to address a couple things – high vacancies in state jobs and the state’s declining population. Here’s Sen. Cathy Giessel, R-Anchorage, making the pitch.
“The population that we’re predominantly losing is age 18 to 64, working-age group, right? We know that there is a serious shortage of teachers. We are watching our police officers and firefighters walk out the door to other states with all the training after five years,” Giessel said at a news conference Tuesday.
And people who have the current 401(k)-style plan would be allowed to transition to the pension plan if this passes.
Casey Grove: So it sounds like the state would take on that risk, but it’d be better for employees. But let’s back up. How did the state end up with the system it currently has?
ES: Now, basically from statehood, there was a pension system for state workers. Not precisely, but just about. And the state got some bad actuarial advice that led to underfunding. And that wound up putting the state billions in the hole. The state still has something like $4 billion in unfunded pension liability from the old system.
One assumption that didn’t work out? People lived a lot longer. And that, naturally, costs a lot more.
So in 2006, the Legislature passed a bill creating the current 401(k)-style system, sometimes called Tier IV. But ever since, lawmakers have been trying to get the state back to a pension system. There’s been a bill in every legislature since 2007 to restore the pension system.
CG: I mean, it just sounds like cost is the issue, right?
ES: That’s right. Or, at least, making sure we don’t end up billions underwater again.
CG: Well, what is the price tag then?
ES: So, it’s not entirely clear. There are at least two different analyses of this out there. One, by an actuary working for the Senate Finance Committee, says it basically comes out in the wash: it’s more or less what the state currently pays for the defined contribution system.
Another, by an actuary hired by the Department of Administration, found that it would cost the state something like $1.2 billion over 16 years.
CG: That’s a pretty big gap. What’s up with that?
ES: Now, here’s the thing: the bigger number assumes the bill works, so to speak.
One of the big goals with this bill is to make it easier to fill government jobs. Not everybody buys that – more on that in a sec – but that’s the goal. The analysis that puts the cost at $1.2 billion, that assumes the state manages to grow its annual payroll spending by $250 million. Basically, by retaining people.
Of course, having open jobs also has a cost: you have to pay bonuses to attract people, maybe give folks overtime, and, of course, there’s a cost to the whole economy when the state doesn’t provide the services it usually does.
So the cost of the system is up for debate, but there are measures embedded in the bill that would help the pension system adjust contributions up and down. Basically, when the fund is looking like it’s too small, employers and employees pay more. Once it’s back looking healthy again, those contributions go back down. So employees’ contributions can flex from 8-12%, depending on how good the fund is looking. Proponents say that would help prevent getting underwater, like the state did the last time.
And this is big, financially: health benefits would stay the same as they currently are for folks on the 401(k)-style Tier IV plan. Some older pension systems had very different health benefit systems that were much more expensive.
CG: How do we know this would improve hiring and retention?
ES: Short answer? We don’t. We can’t see the future. But there’s some evidence suggesting it might.
An actuary hired by the Senate Finance Committee, Gene Kalwarski, said that a pension system is especially important for retaining mid-career teachers, police officers and other public safety workers.
“When these people reach mid-career, they start worrying about retirement, and it’s awfully difficult to keep these people in when they can flip over to the Lower 48 states and find a pension, a defined benefit pension,” Kalwarski told the Senate Finance Committee.
But there are certainly some skeptical folks out there. I mean, obviously there are other states out there with pension plans, and they’re also having trouble filling jobs. Sen. Bert Stedman, R-Sitka, spoke to this.
“If this is being targeted, as the, as the answer to recruitment and retention, why do all the other states with defined benefit plans have retention and recruitment issues?” Stedman asked at a recent Senate Finance Committee meeting. “It doesn’t line up. There’s something else going on other than retirement.”
CG: Where do things go from here?
ES: The bill is scheduled for debate in the state Senate tomorrow, Wednesday. It’s likely to get a couple amendments, but it has 11 Senate cosponsors, so it is likely to pass. But it faces an uphill battle in the mostly-Republican-controlled House. Giessel told me negotiations with the House haven’t really started.
So, you’ll have to stay tuned.