The question of defined benefits for public employees:
Should we return to DB?
Can we afford DB?
Since Alaska closed the door on the Defined Benefits (DB) retirement plan in 2006 to public employees due to the growing unfunded liability, and opened the door to the new Defined Contribution (DC) retirement plan, various legislators have filed bills to re-establish DB retirement plans which many public employees prefer, but not all. The 33rd Legislature is no different with three separate bills already filed; HB 22, SB 11, and SB 35. The most noticeable difference between the three bills is SB 11, which hopes to establish defined benefits for all teachers and public employees, whereas the other two are specific to peace officers and firefighters.
A DB retirement plan pays a set pension amount each month to a retiree, rather than the retiree controlling and managing withdrawals from a 401K type account as would be the case with a DC retirement plan. Both types involve an employer contribution during the public employee’s period of employment. The DC plan requires no additional contribution post-employment, but the DB plan can depending on market returns and other factors – and herein is the risk to the employer: in this case the State of Alaska, as well as local municipalities and school districts (if the pool of eligible employees were to be expanded beyond state peace officers and firefighters to include teachers and municipal workers).
Concern over the state’s unfunded liability (debt) started in 2001 when the pension fund went from nearly $50M overfunded to over $1B underfunded in one year. The concern was validated in 2005 when the liabilities rose to more than $5B and SB 141 was passed. The bill’s intent was to address and overhaul the Public Employees’ Retirement System and the Teachers’ Retirement System underfunded status with the defined contribution plan. Again, the DC plan is similar to a 401(k) and offers flexibility to an employee who wishes to roll their PERS or TRS to another qualifying plan when they leave employment with the state. The DC plan also offers a steady and foreseeable cost to the State of Alaska as the employer as mentioned earlier, a luxury denied by the DB plan.
The formula proposed currently for the “new” tier to re-instate a DB plan (in HB22 for example) is based on the employer contributions of 22%: 12% to the employee and the remaining 10% to the unfunded liability. It’s important to note that with the current DC plan, 13% goes to the unfunded liability which still holds a balance of roughly $4B. There are levers in place with the proposed bills attempting to limit the risk to the state, including a minimum retirement age of 55 for peace officers and firefighters with at least 20 years of service, or an age of 60 with a minimum of five years of service, the ability for employer and employee contribution rates to be increased (note this would increase the annual state budget), the post-pension retirement adjustment is suspended when the plan falls below 90% funded, and the annual cost of living increase is eliminated.
The big question: are these provisions enough to keep Alaska safe from even further debt, from bankrupting the state? Other states have gone belly-up due to massive unfunded liabilities that spun out of control. We do not want to put Alaska at risk and in such a position. The Senate Finance Committee, according to Co-Chair Senator Bert Stedman, plans to take its time examining the proposals and the projections in regard to costs and risks to the state. Senator Stedman led the charge in 2006 away from DB in 2005 to DC, and is likely to be very cautious moving forward. Without making any changes, it is estimated to take 30 more years to eliminate the unfunded liability created pre-2006 by DB.
I am hearing from Alaskans on both sides of the issue. Some public employees are speaking up strongly in support. Others like the flexibility and mobility of a portable 401K type plan and are opposing the change. (Young people today often do not envision themselves staying with the same employer for 20 or 30 years.)
Many are making the case that returning to a DB plan will help with recruitment and retention of public employees. When we hear about workforce shortages in virtually all industries in the private sector, the jury is still out on how much a DB plan would actually help solve recruitment and retention challenges in the public sector.
Many in opposition work in the private sector and have DC type plans; they are concerned about their wallets and how this might impact them down the road – will the return to DB mean future taxes on individuals to pay for post-retirement contributions by the State of Alaska to meet its obligations to retirees? This is an important question that needs to be answered.
What we do know is that we need good employees to stick around. We don’t want trooper vacancies. We need firefighters. We know there’s a national teacher shortage; we must navigate this challenge and overcome it. At the same time, we should not break the bank, and it is not prudent to burden our children and grandchildren nor wise to put the private sector at a disadvantage when the strength and health of our economy depends on it. This is a complex problem; there is no silver bullet.
