SB 88 Pension “Pill”
Better Read the Warning Label
Senator Cathy Giessel, the sponsor of SB 88, and nine co-sponsors from the Senate Majority are touting the bill to reinstate pensions for public employees (rather than the current 401K type retirement system adopted in 2006) as a cure for recruitment and retention challenges.
Although the bill might help ease the workforce issue, it won’t be the cure to the extent they hope – but the harmful side effects are what is troubling. Unfunded state pension liabilities are growing rapidly across the US. One study estimates the total is now $8.28 trillion or just under $25,000 for every man, woman, and child in the United States. This analysis uses a risk-free fixed rate of 4.5% to account for constitutional/legal obligations and to control for rate assumptions over time.[1]
Another study[2] uses higher rates (rosier expectations) which estimates Alaska has $10 billion in unfunded liabilities rather than the $30 billion the first study predicts. Markets are volatile, and playing it safe with lower rates when planning for the future is smart.
Whether we’re $10 billion or $30 billion under water, the point is we’re still short the funds needed for the pensions (defined benefits) still remaining from pre-2006 when under Senator Bert Stedman’s leadership we switched from defined benefits (DB) to defined contributions (DC) for new employees.
Pensions are wonderful but they cannot be offered without putting the state at risk. SB 88 would put some risk on the employee (it contains a trigger to bump up the employee’s contribution from 8% to 10% if needed). The state, however, would ultimately bear the brunt of the risk if markets underperform as it has a constitutional obligation to keep its retirement promises to public employees.
Article XII, Section 7:
Membership in employee retirement systems of the State or its political subdivisions shall constitute a contractual relationship. Accrued benefits of these systems shall not be diminished or impaired.
To meet this contractual obligation, some Alaskans are concerned a DB reinstatement could someday results in taxes on Alaskans. Taxpayers in other states are footing the bill annually to meet public employee pension obligations, so the concern is legitimate.
Alaska ranks 50th for the amount of unfunded pension liabilities per capita.[3]
I do believe we need to address the recruitment and retention issue of state employees, but we need to consider alternative options that do not put the state at risk and will not financially burden future generations.
In a recent Law Finance Subcommittee, Deputy Attorney General Cori Mills reported that salary increases for certain positions approved by the legislature last year resulted in a drastic reduction in the vacancy rate. I asked if the issue of pensions – defined benefits – came up during candidate interviews. She said they did not.
Data from the Pew Charitable Trusts’ article entitled “Retirement Needs and Preferences of Younger Public Workers”[4] shows that younger public employees choose or stay in public employment due to reasons other than retirement packages; these three reasons came out on top: job security, work in specific field/profession, and work-life balance.
Conversations with a few individual teachers and law enforcement officers have highlighted their greater interest in better salaries and employer contribution increases to their 401K while they are working so their retirement fund will be larger when they retire. Solutions such as these would increase the state’s annual budget but would not create a future financial obligation on the state (or on taxpayers). These are ideas worth considering.
Below is the response I have been sending to public employees and union members who have been using a form email with an action network system to express their support for SB 88, the bill that would reinstate defined benefits (pensions). We cannot ignore the potential “harmful side effects” of the SB 88 “pill” being prescribed to cure public employee recruitment and retention issues. We better read the warning label.
Thank you for your input regarding your support for SB 88. It is helpful for me to understand your concerns.
Please know that I am also hearing from many other Alaskans who are private sector workers and retirees and who have 401K type plans, not pension plans. They are very concerned about the risk of future additional unfunded liability in the billions if defined benefits are reinstated. They are worried it could mean a steep income tax not too far down the road. (By the way, less than 25% of private sector workers have pension plans and that percentage continues to decline each year.) Taxpayers in other states are on the hook for ensuring their state meets its contractual obligation to pay public employee retirement pensions, so the concern about a tax burden on Alaskans down the road is understandable.
Some younger public employees have also let me know they do not want “golden handcuffs” and prefer the flexibility and mobility of a portable plan. Employees in their 20’s and 30’s are less likely to want to stay with the same employer for 30 years than was the case back when our grandparents were young workers.
A final point we should all think about as we weigh SB 88 is that it is estimated to take until the year 2039 to pay off the billions in unfunded liability that we already have (due to the public employee pension plans that we had in place pre-2006 when we switched from defined benefits to defined contributions).
It is indeed important that we are able to recruit and retain competent public employees. We all know there is a cost to high turnover, while at the same time, we must be cognizant of the state as a whole, understand the projections and costs to the state, and find a path forward that doesn’t break the bank and doesn’t benefit one group while burdening another.
I would like to see social security benefits reinstated for public employees in addition to their state retirement as part of the solution. We have seen a great improvement in recruitment and retention of certain categories of public employees who have received salary increases, so that may be an option worth considering. Salary increases or increased employer contributions during a person’s employment (to net a larger 401K fund upon retirement) do not create risk after the person retires – so ensure a burden doesn’t fall later on children, grandchildren, and great grandchildren.
I am confident the Senate Finance Committee will vet the SB 88 proposal and perhaps consider additional solutions to help shore up recruitment and retention of our public employees who provide important services to our communities and state.
Thank you again for reaching out to state your support for SB 88. Hearing from constituents and Alaskans is a top priority to me.
Best regards,
[1] “Unaccountable and Unaffordable: Unfunded Public Pension Liabilities Reach $8.2 Trillion” by Lee Schalk, Nick Stark, Thomas Savidge and Jonathan Williams. June 9, 2022. Center for State Fiscal Reform. https://www.thecentersquare.com/national/unfunded-state-pension-liabilities-grow-to-8-28-trillion/article_2cc7ea6c-e743-11ec-a33c-8bc749f2c315.html#:~:text=(The%20Center%20Square)%20%E2%80%93%20Unfunded,the%20American%20Legislative%20Exchange%20Council. accessed March 4, 2023.
[2] “Pension Reform Data Visualization: Unfunded public pension liabilities are forecast to rise to $1.3 trillion in 2022”, by Truong Bui, Jordan Campbell, Zackary Christensen. July 14, 2022. Reason Foundation. https://reason.org/data-visualization/2022-public-pension-forecaster/ accessed March 4, 2023.
[3] “Unaccountable and Unaffordable: Unfunded Public Pension Liabilities Reach $8.2 Trillion” by Lee Schalk, Nick Stark, Thomas Savidge and Jonathan Williams. June 9, 2022. Center for State Fiscal Reform. https://www.thecentersquare.com/national/unfunded-state-pension-liabilities-grow-to-8-28-trillion/article_2cc7ea6c-e743-11ec-a33c-8bc749f2c315.html#:~:text=(The%20Center%20Square)%20%E2%80%93%20Unfunded,the%20American%20Legislative%20Exchange%20Council. accessed March 4, 2023.
[4] “Retirement Needs and Preferences of Younger Public Workers”, Issue Brief, May, 2017. The Pew Charitable Trusts. https://www.pewtrusts.org/-/media/assets/2017/05/younger_worker_survey_brief_v1.pdf accessed March 4, 2023.
