Hearings began this week for a high-priority bill that would reform the retirement system for state and local government employees. House Bill 78 would create a new pension system for public-sector workers, replacing the current defined contribution plan.
Returning the state's workforce to a pension plan was a major campaign issue for the largely Democratic House and Senate coalition majorities. The new bill is similar to one that passed the Senate last session but did not advance in the Republican-led House — but it shares few similarities with the state's prior pension systems, House Majority Leader Chuck Kopp, R-Anchorage, said during a presentation on Monday.
"This is structurally so different that it's barely recognizable," he told the House Finance Committee. "It’d be like comparing a rotten apple on an old tree to a robust pear on a living tree — they're both fruit, but it ends there."
For decades, the state provided a generous pension to public employees — cops, teachers, firefighters, snowplow drivers and so on. Over the years, lawmakers trimmed the program. Then, in 2006, the state closed it off entirely.
Kopp told the committee that poor advice from the state’s contracted actuaries, and a cover-up that wound up in court, resulted in state lawmakers badly underfunding the program and creating a spiral of unfunded pension and health care liabilities that the state is still reckoning with years later.
Lawmakers replaced the pension system with a 401(k)-style defined contribution program — Tier IV for those in the Public Employees Retirement System, Tier III for educators in the Teachers Retirement System.
Here's how it works: on each paycheck, state and local workers put 8% of their paychecks into a retirement account. The employer — whether it’s the state, a municipal government or something else — chips in another fraction: 7% for teachers and 5% for just about anyone else.
If the employee leaves, what they contribute is theirs, but the employer contributions are restricted until they've worked five years. At the five-year mark, employees are vested, and thus no longer obligated to stick around in order to keep their retirement savings — and Kopp said that’s a powerful signal to state and local government workers.
"We've created a system that points to a value of leaving at five years," Kopp said. "Beyond that, you don't have a value for retaining employees."
It’s showing up in retirement system data, too, Kopp said — many are happy to skip town for higher-paying jobs elsewhere.
"90% of these withdrawals (are) coming right after the five year mark, or when someone was 100% vested," he said. "Employees are cashing out and moving on."
That means Alaskans miss out on the most productive periods of public servants’ careers, Kopp said. Teachers, he said, are more effective after spending a few years in the classroom. Kopp, a retired police officer, said most officers take two years of on-the-job training before they can work without close supervision.
"By the time you hit five years, you're becoming really valuable," he said. "If those five-year people are going to one of the other 49 states with a more competitive retirement program — which we'll hear from testimony that they are — that's a challenge."
Citing research presented to Senate lawmakers last year, Kopp said a new pension system would better retain those mid- and late-career workers who know the most about how to do their jobs, whether they’re running the engine room on a ferry or teaching a class of rowdy seventh-graders.
The system proposed in House Bill 78 builds from what advocates are calling a “shared-risk” model. It would ratchet contributions up and down depending on how well the state’s pension fund performs — so if it’s looking like the pension fund is running short of its obligations, the employee and employer would each have to contribute more.
Retirees would shoulder some risk, too — the state could withhold inflation adjustments on pension payments to keep the plan solvent. Kopp said the proposal borrows from the lessons of other pension systems in states across the country.
"We believe this plan will be the most risk-averse retirement plan in the country," Kopp said at a news conference on Tuesday.
The plan would allow most workers to retire at age 60 or after 30 years of service. Public safety workers could retire at 50 with 25 years, or at 55 with 20 years. Medical coverage would remain the same as it is now for those on the defined contribution plan.
The plan is getting a hard look from House lawmakers this week. One key question is how much the plan would cost, which is likely to be a big subject of debate in the weeks to come. Last year, dueling estimates with differing assumptions and methodologies came to wildly different conclusions about what the plan could cost.
But another area of skepticism is over whether a pension would actually make a dent in the state’s struggle to hire and retain workers. Rep. Jeremy Bynum, R-Ketchikan, who led the electric division of Ketchikan Public Utilities, said the state's retirement plan wasn’t the main factor driving turnover.
"The biggest issues that drove employees where I was at away was the cost of living in the community," he said. "It was being able to afford their home. It was being able to make sure that their kids had a good school to go to and that their schools were taken care of. It was the remoteness of being in Alaska and away from their family and other places."
The bill is a priority for House leadership and for Kopp personally — Kopp said his predecessor’s refusal to advance a pension bill was a primary factor pushing him to run for office again.
Sen. Cathy Giessel, R-Anchorage, who shepherded a pension bill through the Senate last year, said she expects the Senate to take a closer look at the bill once it passes the House.
