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.