STATE STILL OWES $5.5 BILLION TO THE PRE-2007 LEGACY PENSION PROGRAM
By BERNADETTE WILSON
Two pieces of legislation currently before Alaska lawmakers, House Bills 55 and 220, would allow teachers, public safety personnel, and other public employees access into a poorly designed defined benefit pension system that exposes the state to significant risks of debt and unforeseen costs.
Both proposals have serious design issues. And, when combined with Alaska’s tax structure that is highly reliant on oil prices, a perfect storm could be brewing that might crowd out other services and may lead to the implementation of a sales or income tax on its citizens.
When Alaska elected to adopt a defined contribution retirement plan for its public employees in 2006, there were two major arguments for the change. Unfunded pension liabilities had already begun to accrue at an unsustainable rate, and the state feared another major revenue shortage like it had in the late 1980s and early 1990s impacting its ability to pay for the debt on their underfunded obligations while still maintaining public service levels.
A May 2019 paper sponsored by the National Conference on Public Employee Retirement Systems argued: “Economic strength of [the] plan sponsor is very important to understanding whether a system is in crisis or not.” It went on to say that “true security behind a public pension plan is the economic health and strength of the economy supporting the plan sponsor.” While the paper goes on to argue that governments are not like private entities and thus won’t disappear overnight, Alaska, inparticular, currently functions much more like a private entity than any other state in the country due to how the state uses oil and gas revenues. Right now, oil and gas tax revenues are deposited into the state budget. As the price of oil fluctuates, so does Alaska’s budget revenues and deficits. These deficits reached a crisis point in 2015 when then Governor Walker proposed a litany of new taxes to help shore up a $3.5 billion hole in the state’s budget.
While Alaska won’t ‘disappear’ like a private entity, this volatile revenue structure can most certainly lead to the disappearance of funds necessary to pay for promised benefits. And because these two pension proposals are using the same antiquated funding mechanisms that have continued to plague the state’s legacy pension plan, Alaska will once again very likely face rising pension costs in the near future.
One consequence of these rising costs will come when the state will almost certainly be forced to lower its assumed rate on investment returns. The state still uses a 7.38% return assumption on its legacy pensions, and the two pension proposals would continue to use that same rate. This rate is above the national average and will, without a doubt, have to come down in the near future. This will immediately expose the state to massive increases in costs and underfunding in its brand-new pension plans.
With Alaska’s legislative session scheduled to end on May 18, time is running out for HB 220 as it has yet to be voted out of the House. Recognizing this lack of time, the House Education committee recently tried to insert HB 220’s language into a bipartisan education bill that had already passed the Senate, but this idea was ultimately voted down by the committee.
However, HB 55 has passed the House and now awaits a scheduled hearing in the Senate Finance committee. This hearing comes after some political potential maneuvering forced the HB 55 out of the Senate Labor and Commerce committee without a vote being held by the committee.
If these bills do pass, and when the likely scenario of unexpected costs occurs, this could create a massive budgetary problem for Alaska. With the volatility of oil prices, these costs may come at a time when the state does not have the revenues to pay for them. That leaves two options: allow the pension systems to accrue debt and hope the state finances recover fast enough to pay down that debt or pass a tax increase on the citizens of Alaska like Governor Walker proposed in 2015.
Alaska lawmakers need to consider these proposals more thoroughly before adding the potential for billions in unexpected costs, on top of the over $5.5 billion the state still owes to its legacy pension members.
Bernadette Wilson is the state director for Americans for Prosperity Alaska and is a small business owner.
The bills will pass, the budget deficit will increase and the people of Alaska will suffer the brunt. This is part of the plan.
The Benefit Pension System is a very poorly designed system that will cause our state to become heavily indebted ensuring that Alaskans will NEVER see a REAL PFD. The legislature would be very happy with that; it would give them more of our money to play with and spend as they see fit because, obviously we, the people, are not bright enough to spend it on our own. The Governor should vetoe this bill along with sending them back for a REAL budget (without pay) to do the only job they have and that is to pass a reasonable balanced budget without taking the people’s PFD.
A few points are missing here. We have a law enforcement staffing crisis. Our current system is five and out. Go to Alaska to get hired, trained, certified, gain those valuable 5+ years experience. Then, take the money and run to greener pastures (law enforcement agencies love lateral transfers for the huge cost savings). We are paying signing bonuses, paying officers to not call in sick, recruiting, training, certifying in a never ending circle. To make the pension beneficial one needs to work at least 15 years.
Not only that, but the country’s entire work force is undermanned. No amount of pay or incentives are going to fix it. I can’t find even entry level employees that are willing to work for $30 an hour. This is not a local problem and pay and incentives will not fix it.
You forget that many Alaskans enjoy the benefit of “free” law enforcement in their communities and are perfectly satisfied with a slow response (due to staffing+distance) by a wet-behind-the-ears pseudo Trooper until it’s their house that’s being broken into.
Something else that few folks are aware of. Most assume that police agencies are unionized…no, not really. Even though they are organized for collective bargaining, the “Association” has no real power since any type of organized job action (working to letter of contract) is illegal.
If you want mature Troopers who’ll commit to sticking around longer, require less recruitment and re-trainings, and cause the SOA to get sued less often, better pay for it.
By the way, for you politicians trying to make mileage out of the “evils” of defined benefit…few Troopers after s career of filling their souls with the memories of the worst days of their lives of hundreds of people, live longer than five years into retirement.
Dear Alaska Legislature,
Please have the good sense to not add to our (and yours) Damocles Sword issues…
Thank you.
Listen – politicians, particularly Democrats have been after a full, 100% confiscation of the PFD and have been pining after an income tax for decades. They’re getting closer with each and every legislative session. Everyone must realize that the days of the statutory PFD payments are GONE, NEVER to be seen again and that any semblance of it will disappear by 2030; if not sooner. This, along with an income tax by 2026 will be the new normal. This bill will pass, along with others in the future for full pensions for ALL public employees again.
The road to income tax is clear
Sally Duncan for governor immediately thank you ma’am
I agree with everything this woman, whom I do not know, has said. However, from my perspective she has overlooked the most important reasons why Alaskans should fear this legislation! Unique to Alaska we have municipal officials who represent no one with skin in the game making personnel decisions that run up the defined benefit public pension costs right now. That is, REAA school boards, and municipal officials in places like Tok, Gustavus, and Bethel can and do decide to enrich public employees who are defined benefit enrollees that cost those decision makers nothing; all cost are passed directly to the state right now. The last existing DB PERS and TRS beneficiary will be drawing dollars until 2070. Restarting DB without addressing this inequality while increasing the uncertainty that comes from DB would be malfeasance. Also, we need every acre of private land paying some level of property tax; right now only the largest municipalities have a property tax, and almost all the 44 million acres owned by Native corporations pay no property tax. It’s no wonder that a legislator from Bethel or Dillingham would vote for taking on a new liability and plan on a state income tax to pay for it. This is another inequality and economic dislocation that needs to be remedied before anyone talks about defined benefits for public employees. Governor Dunleavy could veto this bill without it costing him one vote as Walker and Gara will receive all the public employee union dollars and votes. Starting up a new DB program for public employees would be terrible for Alaska. Public employees work a 37.5 hour week, and have far more vacation and paid holidays than the Alaska private sector; that is enough!
Hey kayak, if you think the majority of State employees actually work only 37.5 hours a week, I’ve got a bridge to sell you. The vast majority of field office employees are not clock-watchers, are hard working, dedicated and conscientious and give back far more to the communities they serve than they receive. Stop with the class warfare BS. If you think state employees have it so great, why can’t the state fill unfilled positions these days? Maybe you should belly up to the public trough if it’s so wonderful? There’s lots of jobs available that no one wants. Go for it.
BS! Drive through the parking lot of a State office building at 4:45 and see how many cars are still there. A few supervisors and managerial employees will still be at work, but the rest are on the way home or on the way to the bar.
Fundamentally, our best and brightest catch the first ferry or plane after they hear “Pomp and Circumstance” and never come back to Alaska. Most of those who are left here to join the workforce have no idea of what work is and many have very bad personal habits. It is worse in safety sensitive or law enforcement positions because Alaska has so few people who can pee in a bottle and pass a background check.
When I was a hiring manager, in the unlikely event that I could find a candidate who knew what work was, I couldn’t keep them longer than the probationary period because somebody would offer them a promotion. The rest of them, I generally couldn’t get rid of fast enough.
What Sally said.
We need to pass the Constitutional Convention in November so we can reel in our bloated state bureaucracy and give a voice back to the citizens of alaska.
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