Don Smith: Defined benefits would bankrupt Alaska

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Sen. Cathy Giessel presses to get SB 88, a defined pension program, back on the books for all state and local employees in Alaska, during a hearing in Senate Finance.

By DON SMITH

Let’s investigate Sen. Cathy Giessel’s real motivations behind her advocacy of increased union benefits. But first, allow me to outline my credentials on the topic. 

I was a mergers and acquisitions specialist regarding benefit plans at AT&T corporate headquarters and served as AT&T Alascom’s vice president of Human Resources.  I was employed by the Alaska Railroad as a labor relations officer and served as the chief Human Resources officer at the University of Alaska (statewide). I know a lot about how defined benefits and defined contribution plans work. And frankly, her arguments for a new defined benefit plan are disingenuous. 

How Sen. Giessel packages and sells this financial black hole to Alaskans needs more scrutiny. She asserts that the State of Alaska’s low employee retention and recruitment levels have reached crisis proportions because the state does not offer a defined benefit retirement plan. What data does she present to support this assertion? 

Apparently, she has no comparative data with the private sector, for whom defined benefit (DB) plans began disappearing three decades ago?  

My experience as an executive in the private sector in Alaska, and as an executive of public sector corporations, is that attraction and retention in both sectors are equivalent and in equilibrium. I disagree with the senator’s assertions that attraction and retention require higher levels of public benefits. Proof of this is readily available via a survey of public vs. private levels of compensation for the same or similar positions.  

It is a fact that the remaining defined benefit plans are found solely in government employment and a few legacy private sector industries that have been unable to shed defined benefit plans.  And those legacy DBs will also disappear when existing participants pass on because no new participants are allowed to enroll. 

It is also a fact that in the private sector no new defined benefit plans have been implemented for over two decades.  Perhaps those private sector fiduciaries know something about defined benefits that Sen. Giessel is ignoring? Is her focus really on levelling the employment playing field, or on tilting it in favor of unions?  

Please spend a few moments reading about why defined benefits plans failed at Investopedia.

Sen. Giessel suggests that SB 88 employs best practices that are used in other state’s DBs. However, if these other state’s incorporate best practices, then why is it that every state retirement defined benefit in the country, except Minnesota’s, is essentially insolvent? For evidence of this, examine the fiscal insolvency of defined benefits in California, Pennsylvania, New Jersey, and Illinois. I wonder if Giessel is aware that politicians in those states have sought federal bailouts for their insolvent plans?  Is that part of the best practices she believes Alaska should follow?

The defined benefits in those states are insolvent chiefly because those DBs are a mandatory subject of collective bargaining. Since they are a mandatory subject of collective bargaining, they are a prime target for union negotiators.  It is no exaggeration to say that public sector defined benefits have become increasingly lavish to the point of insolvency, and their history is hidden from taxpayers. Politicians, it seems, prey on non-transparency, the bending of truth and “public interest finding” they are sworn to uphold.  

Unless defined benefits are “off-the-table,” State negotiators are often too conciliatory and generous with these benefits because they are an invisible concession, “down the road” and they are unquantified.  

The press focuses on wage increases, never on the obscure benefit plans. But as defined benefits increase, and the employee population of plan contributors decreases relative to the number of beneficiaries, the plans become insolvent. That is the reason why the private sector began to abandon them 30  years ago. That is why Alaska is already carrying such a huge unfunded liability, and the defined benefits in other states are insolvent.

Sen. Giessel’s representations that her proposed defined benefits will be confined to a relatively small sub-population of state employees is disingenuous. Once the plan is in place for a few employees, the labor unions for all other employees will demand the same defined benefit and the pandering legislators will have no basis to object. 

Then we will have set the stage for the same disaster and fiscal mismanagement that doomed PERS I, II, and III. If it actually succeeds, it will come at the expense of the private sector and middle-class taxpayers. 

I agree with Sen. Giessel that the current PERS IV is inadequate as a standalone retirement plan.  The simple fix to that is to do what every private sector defined contribution plan has done and that is provide employer matching funds to employee contributions. 

There are a variety of vesting schemes available to protect the employer and employee. The employer can adjust the contribution for the desired economic level.  Typically, the employer match is in the range of 2% to 10% of the first 15% of an employee’s contribution. The advantage of the combined contribution plan with an employer match is that both parties have vested interest in the success of the plan.

In summary, Sen. Giessel believes her proposed defined will save money over the existing defined contribution plan (i.e., PERS IV). With respect, I find that assertion incredulous. If she is going to propose a plan of this potential fiscal impact to Alaska’s future, it’s incumbent on her to show Alaska’s future taxpayers the numbers. I’ve asked her to please reply with a worksheet that supports her assertion.

Don Smith is retired executive who specialized in human resources, labor relations, and mergers and acquisitions.

40 COMMENTS

  1. BLUF: Good pay, good healthcare, quality of work environment and time off are the top priorities of most of the workforce. The US has a defined benefit called SS and its a mess, as are ALL govt managed plans. The SOA does not pay its labor workforce well. The MOA, very similar. Its the benefits and govt job stereotypes that keep most. Pay them better, offer quality health plans, match 401k contributions and give great leave benefits. You will get awesome employees.

    • You offer a ludicrous argument. When I was a kid, most jobs in Alaska were seasonal. Most of the year round jobs were state and city jobs. Those that got them, kept them until they died because they didn’t pay what the seanoal job did but, the paycheck came every month. This was true until 1972, when pipeline jobs started. More and more people came to Alaska, the the pipeline got done and Al Bafone came up here and started Local 71 and that was the beginning of the hooray for me, screw you SOA employee. The fact that public employees can unionize is ludicrous. A guaranteed job at a really good wage is never enough. Every state or muni emolyee that doesn’t want their job should quit and it will be filled the next day.

      • “Every state or muni employee that doesn’t want their job should quit and it will be filled the next day.”
        Respectfully Robert, I be to differ. Both the SOA and the MUNI can not fill positions for mechanics, drivers etc. because the wages offered are not competitive with the private sector. I personally know of individuals, who left the SOA, because their wage did not provide for their growing families. These are skilled individuals, who chose to go to the private sector to earn a decent living. AKdale is correct, pay them comparatively, provide them with advancement opportunities, offer a health plan that is affordable and maintain the 401k contribution model and you will find plenty of people, who want to stay.

        • Well they can’t balance thier income with expenses so they deserve more money?
          Six figure income with health care benefits and lots of time off is not enough?
          You are not looking at the picture clearly.
          If the union workers get more the consumer pays more so it is a viscous circle.
          Look at prices and wages over the years in 1970 bread was under a dollar and pay was under 5 dollars an hour.
          Screw public unions.

  2. Giessel is a liar. This isn’t news.

    Until unions are broken in this state, we remain on the road to economic oblivion.

  3. This is why the days of PFD checks are numbered. Politicians see that money going back to citizens as being “wasted” when they could be using it to buy votes.

    • Once they kill the PFD, they will go after the corpus and empty the entire fund. They won’t be able to restrain themselves.

      • That’s been their plan all along.
        The citizens of Alaska don’t see it they just keep non voting and complaining about costs.

  4. we’ve seen the results, over the past 15 years, of explotive economic reasoning. this comment will not be published by the homer east coast elitist posing in another capacity.

    so far: populist government, 6 billion dollar capital spending at the state level to elicit demand, gerrymandering the state unsuccessfully after two court cases, defunding labor at the personal level vs “capital” level,redirecting school board efforts to decrease spending at public vs private schools.

    the list goes on, now at the national level, of the deconstruction of the middle class into the servitude class. defined pensions were a stalwart of the “old days” everyone remembers but is unwilling to fund via a fair and equitable tax structure, either at the state of national level. you get what you pay for, vote for rational government, rational polices and vote for the rational candidate and you get rational governance

    alaska became the test bed for wacky national government after 2008, follow the east coast monies for the studies and funding to the less government is good idea crowd.

  5. Cathy was always a Democrat. She hid behind the Republican name as long as she could…….until she couldn’t anymore.

  6. Hey Cathy, I wish I had your salary for 90 days of work and the gargantuan entitlements you receive. You are out of touch with most state employees. First and foremost, the villain for SOA employees is not the retirement benefits…it’s the salary, period, dot. Yes, I’m a SOA employee and only staying on because I have a military annuity supplementing the sorry wages. Otherwise, I would have bailed out at the five-year point.

  7. She wants to be governor. The incumbent is termed-out. This will give her something to run on beginning 2 yrs from now.

  8. I love that picture. She looks like she’s not moved her bowels since the Nixon administration.

  9. ” I’ve asked her to please reply with a worksheet that supports her assertion.”
    That will never happen

  10. The Founder of the New Deal, advocate for private sector unions, well known right-wing nut (sarcasm), and only three term President of The United States Franklin Delano Roosevelt is quoted as saying in his letter to Mr. Luther C. Steward who was the President of the National Federation of Federal Employees:
    “All Government employees should realize that the process of collective bargaining, as usually understood, cannot be transplanted into the public service. It has its distinct and insurmountable limitations when applied to public personnel management. The very nature and purposes of Government make it impossible for administrative officials to represent fully or to bind the employer in mutual discussions with Government employee organizations. The employer is the whole people, who speak by means of laws enacted by their representatives in Congress. Accordingly, administrative officials and employees alike are governed and guided, and in many instances restricted, by laws which establish policies, procedures, or rules in personnel matters.”
    ‘https://www.presidency.ucsb.edu/documents/letter-the-resolution-federation-federal-employees-against-strikes-federal-service’

  11. Giessel is a clown. Voters should have kept her far away from the legislature. The existing defined benefit obligations for Alaska- due to the old systems is around $8 billion dollars. The total obligation over the next decades is more than is found in the corpus of the Permanent Fund. No way we should ever go back to defined benefits. Giessel can not be trusted.

  12. Giessel has found new political friends since she got her butt spanked two years ago. She trying hard to make a comeback in the Senate, but her friends there will never let her become president again. In short, she’s not to be trusted. Ever.

  13. Employee contributions matched by employer worked for me. It is the only way to ensure a long-running way to fund a retirement. The problem with Giessel is that she hates Dunleavy and would love to stick him with this, and also that she is one of the power brokers in the state senate, which makes her dangerous. It is amazing to me how she keeps getting elected in a so-called conservative area.

  14. The sooner we just let these clowns pillage the state’s wealth the better. Then we might be able to have real representation again without special interests running the state. One good thing about being broke, you don’t need to worry about being robbed. And obviously, as long as there is money, we will continue to attract the wrong people to public office. You can’t get rid of cockroaches and other unattractive critters unless you change the environment that they thrive in.

  15. I would like to know if Dunleavy will veto this if it passes. Will he do the right thing for the SOA? I’d like to know that he will put an end to this foolishness.

    Also, there is plenty of information available about how much our high paid state employees receive. Is there also information about the amount they (PERS I, II, III) are paid in retirement to not work. I know a handful who are supposedly paid more than 150K in retirement!

  16. Bankrupting the state is not a bug. It IS the goal.
    If you have never heard of the Cloward Piven strategy, look it up. Overload the system to the point it collapses, then take over control of the ruins so you can build it back into your socialist utopia. (Where the politically connected enjoy all the luxuries and the average person lives in abject poverty.) (Example: See everything the WEF is advocating.)

  17. I’m not even sympathetic with the “lower wages” problem. My father and my father-in-law both always said that public employees should be paid less than private industry because they got something else as a benefit–better job security. When the unions start whining because their members aren’t making as much as someone outside government, it doesn’t pluck my heartstrings at all.

  18. One real issue for everyone here is how to retire before 65 and Medicare because the cost of insurance on the exchange is astronomical. Federal law needs to be changed to allow cross state purchasing. Many people I know with plenty in retirement leave to go somewhere else if they want to retire before 65 because the healthcare cost here will quickly eat your savings. People leave this state because retirement here is expensive and now the MOA doesn’t appear to want to help change that by consistently increasing property taxes. A defined plan isn’t going to fix that issue. State employees also have a raw deal because they can’t collect social security later. I would support a bigger match for them with vesting depending on years of service like the private sector. Out retention issues here are much bigger than state employees. That’s why our population isn’t growing.

    • That’s my ultimate plan. I love it here, was born here, all the fun stuff. But the simple fact is the costs of healthcare for a person my age exceed what I can comfortably pay once my wife and I both retire. At the end of the day it’s simple economics.

      People in Arizona pay mortgages less than I pay in rent here in Juneau. Surgeries I’ve had down south were less expensive and more fully covered. Including the costs involved in being away from home for extended periods.

      Until we can get a grip on out outsized cost of living, the drain will continue.

      Sad side note. All my kids went south so they could afford buying a house and being able to have children.

      • An old 302 welder told me years ago that if government workers gave up their homestead rights like the construction workers who get no paid sick days , no paid vacations and can be laid off any time. may be they could unionize.

  19. Troopers are short handed, Corrections is short handed. We want to “back the blue” and get upset with the levels of crime, but don’t want to provide the incentive to recruit quality officers and retain them beyond the 5 year vestment period, after which many leave for other states which have pensions. As our Tier III officers hit retirement, they are being replaced by Tier IV, where many leave after five years. Instead of having seasoned, experienced officers, we get rookies or newer officers. This has a demonstrable effect on the safety of Alaska and her citizens. Bring back the pension!

  20. In 2009 I began collecting a ‘defined benefit’ pension from the United Food and Commercial Workers Unions and Employers Pension Plan. In 2010 the Plan was placed in ‘critical [financial] status’, my ‘defined benefit’ became a ‘redefined benefit’, and I received a 21% cut to my pension. In 2013 my ‘redefined benefit’ became a ‘re-redefined benefit’, and I suffered an additional 39% benefit cut, making for a total cut of 52% from the original pension amount. Here is a link to a website that lists the HUNDREDS of ‘defined benefit’ private sector pension plans that are in critical status or worse: ‘https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/public-disclosure/critical-status-notices

    The legislature needs to somehow get beyond their infatuation with Cathy Giessel’s stunning good looks and proceed to drive a stake through the heart of SB 88 post-haste …

  21. As a retirement plan consultant for over 30 years I could not agree more with Don Smith.
    Alaska has a huge unfunded liability from its prior plan
    Reinstating a new defined benefit plan would surely put us on the road to being bankrupt as a state

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