The Alaska Legislature’s House Finance Committee held a hearing Wednesday to assess the funding status of the Public Employees’ Retirement System (PERS) and the Teachers’ Retirement System (TRS).
In particular, the portions of those systems that guarantee life-long payments to retirees and their designated survivors, called defined benefits, have a past-due debt, guaranteed to them by the Alaska Constitution and by contract law, of about $7.1 billion. That unfunded liability is of interest to lawmakers, fiscal conservatives, and everyday Alaskans who may, through future taxes, have to support every public employment retiree for 30 years or more in their retirement years.
The return to defined benefits for government workers is a priority for the Democrats who control both the House and Senate this session, although the bill at play is being sponsored by cross-over Republican Sen. Cathy Giessel.
You can view the House Finance Committee discussion at this link.
View the presentation slides at this link.
In years when those trust funds, as managed by the Alaska Treasury, earn better than 7.25% that state debt amount is reduced, but the converse is also true.
While municipalities, school districts, and independent government agencies share portions of that liability, the deep pocket is the State of Alaska. Lawmakers discussed long-term financial commitments, funding challenges, and policy considerations surrounding state employee retirement systems. Committee members raised questions about Alaska’s unique financial landscape.
One key point of discussion was how Alaska compares to other states in terms of taxation and economic structure.
A few other states have even larger past-due public employee retirement liabilities (meaning the 2025 discounted value of future payments owed to those who have retired or will one day retire) but the Alaska defined benefits plans have been closed to new employees for almost 20 years, and that may be unique to Alaska. New legislators are especially surprised that an obligation closed to new entrants that long ago could today amount to almost 10% percent of the Permanent Fund corpus.
It’s possible that had the state not closed these plans 19 years ago, the past-due amount could be 30% or more of the Permanent Fund corpus. (Alaskans can thank Sen. Bert Stedman and the late Sen. Lyda Green that the liability is no larger than it is.) The defined contribution plans, which replaced the defined benefits plans, accumulate no unpaid liabilities, and that was the chief reason the Alaska Legislature made that change nearly 20 years ago.
Notably, Alaska and New Hampshire are the only two states without a state sales tax or a state income tax. However, unlike New Hampshire, which has long relied on a lean government, Alaska faces economic challenges due to the huge size of state and
municipal government and the dramatic decline in oil production.
Back when Alaska first faced the prospect of North Slope production one day falling off, there was a wide-spread belief that by today Alaska would have a thriving barley farming and dairy industry, a plastics industry, a forest products industry even larger than existed back then, water exports to California and Arizona, a rail connection to the rest of North America, and a variety of basic industry as can be found in other states. None of that has occurred; the only diversification of the economy is the growth of the nonprofit sector, which transfers money from U.S. taxpayers to perform various functions, some useful, some not.
The hearing also revisited the 2014 decision to allocate $3 billion from state funds to PERS and TRS trust funds, a move that benefited over 100 employers in the state.
State Dependence and Municipal Funding
One issue underlying the discussion was the extent to which Alaska’s municipalities depend on the state government for essential services, including K-12 education and law enforcement. Many towns and villages assess no property tax.
Because of this reliance on state revenues for local services, retirement costs for municipal employees ultimately fall to the state’s General Fund. Lawmakers noted that some hiring and employment decisions made by local governments create
financial obligations that the state must address.
The hearing highlighted concerns about public employers making decisions that affect the overall PERS and TRS systems. One example sometimes discussed in committees is the sale of a large municipal utility to the private sector while retaining PERS liabilities, which may have increased the sale price but also contributed to the state’s unfunded pension obligations. The discussion underscored the challenges of ensuring fiscal accountability when retirement liabilities are shifted to the state level.
The Impact of Federal Legislation
A major recent development that was not widely addressed during the hearing was Congress’ approval of H.R. 82, the Social Security Fairness Act.
This legislation eliminates the reduction in Social Security benefits that previously affected many Alaska public employees. One Alaskan who testified noted that after 19 years of state employment, his Social Security benefits were reduced by two-
thirds.
However, with the passage of H.R. 82, those reductions will be restored (retro-active to the beginning of 2024), providing a significant benefit to defined contribution plan members. With these Social Security protections in place, some fiscal conservatives believe that discussions about reintroducing a defined benefit program may no longer be necessary. Alaska’s defined contribution retirement plan is demonstrably generous compared to Alaska private-sector plans, and the restoration of full Social Security benefits further strengthens public employees’ retirement security. Thanks in no small part to our delegation to Congress, Social Security now becomes a full defined benefit plan for public employees.
Unfunded liabilities and fiscal prudence
The hearing also revisited the 2014 decision to allocate $3 billion from state funds to PERS and TRS trust funds, a move that benefited over 100 employers.
Some committee members have apparent concerns that such a long-standing financial burden remains unresolved, particularly given the decline in oil production and the lack of significant economic diversification in Alaska. Some questioned whether such financial interventions should continue in the future, given the state’s uncertain revenue outlook. As of this writing there are bills in the Alaska Senate which would restart the defined benefits plans for PERS and TRS, but as of now there are no such bills in the
House.
Must Read Alaska’s fiscally conservative readers expect Sen. Bert Stedman will attempt to explain to his colleagues why a return to these expensive and still unfunded plans is a risky idea for Alaska.
Between this and the schoolteachers, you can say bye-bye to the PFD and hi-hi to the State income tax. Thank the RINOs.
You stated the entire problem in two sentences. I have been told many times that none of the other 49 states protects state and municipal government pensions in its constitution. And as we know the PFD is not in the constitution (though the current governor made many weak attempts to bring that to the voters. So this defined benefit effort, by the RINOs exactly as you said, is a public employee union grab at the remainder of the Permanent Fund.
Hell no let them have a 401 like the rest of us.
What makes them so important that we have to loose the PFD to pay billions for state employees who have good jobs already.
Government workers are parasite.
Every encounter you have with government workers is slow service, ego trip because of power, low IQ, slow, bad service.
401K like people that have to do real work in the private sector.
Republicans have the majority – but the RINO’s caucus with the Democrats.
Traitors, truly.
Yeah because the private sector produces such good customer service…
Go the UMV versus the DMV.
Go to UPS or FedEx versus the Post Office.
Are you a parasitic government worker Jeff that wants more benefits than the taxpayers get – because you provide such great service?
Are you saying out police, troopers, firefighters, EMS, and corrections officers are parasites? If that’s the case I expect you to never call 911
The Retirement Board and Senate Finance Committee held hearings prior to the decision to move $3b into the retirement fund.
What I recall most, was the discussion on interest earnings assumptions. The historic 1985/6 decision to assume retirement investments would earn 8.5 percent over estimated the return and underfunded the account. Increased longevity added to the underfunded amount, which was estimated at $12 billion. As I recall.
The national and international experts brought in to testify noted that a 5.5% rate of return was more appropriate. And European funds assumed 4.5%.
So why not just change the assumed rate of return? Because the increased funding needed to provide a defined benefit would bankrupt every municipality in Alaska.
One economist explained that having moved to defined contributions, the problem would slowly cure itself, as retirees pass away.
My good friend, a retired Commissioner, famously proposed that instead if handing out gold watches on retirement (we don’t), humorously proposed giving every retiree a keg of whiskey and the top Ducatti racing motorcycle. Problem solved! Ha!
Great. They want to bankrupt the state to confiscate the PFD and/or reinstate the income tax.
You are underestimating their greed. They want the PFD and an income tax. The bill sponsors are Senator Giessel and Senator Kiehl.
It will be and.
As a public employee, I would want to invest my own funds, and not be dependent on a reduced pension rate that doesn’t match inflation. Please Alaska, if you want to encourage Alaskan retirements add a match to our 401Ks.
Same here.
“pros”
the unions will be happy.
cons
it will completely bankrupt the state.
Alaska seems determined to do everything possible to commit economic suicide.
Ever so true!
Lea should be the last person to testify on the pros and cons. A defined pension would benefit her. A third-party consultant should have been used.
Public and private companies have divested themselves of defined pension years ago. They cannot be sustained. Too expensive. The only entities providing these pensions are local, state and federal governments. And, like Alaska and Anchorage, many are abandoning those pensions. Again, too expensive. Even unions are finding it nearly impossible to hang onto their pensions.
Giessel and Stedman and others will need to explain to the rest of Alaska why they plan to raid the permanent fund to pay for their reinstated retirement pensions. Especially since most of their constituents do not, and cannot, have one themselves.
Your second paragraph is accurate and well-stated. But you are mistaken in the other paragraphs. Division Director Kathy Lea, who made a great presentation of a complicated subject, stated she has been in the Division for 32 years. So she already is in defined benefit.
Giessel is as you say, but Stedman will defend the defined contribution the state has right now. It’s his legacy achievement, and returning to defined benefit would in fact bankrupt the state and those municipalities that collect a property tax.
Exactly. They want their retirement guaranteed and should not have been allowed to testify. A bit of a conflict of interest, wouldn’t you say?
This will guarantee that all the government workers will vote Democrat because they get their benefits from the politicians. Bunch of crooks.
Not all, but most. Some are true Alaskan Patriots and voted against the state busting idea.
State employee and union member here. Voted republican across the board besides Ron Paul in 2012.
I’m a state employee and don’t support this idea.
The amount of cash required to fund a retirement is pretty much the same in either er a defined benefit or a defined contribution scheme. The main difference between the two is who holds the risk. In recent years, businesses and governments have offloaded pension risk to their employees, most of whom are unqualified to manage seven-digit investment funds over the long term. This activity is better suited to investment professionals and fund managers. Furthermore, private 401K funds used to support pensions are not protected against failure by the Pension Benefit Guaranty Corporation.
The trend to offload these performance risks to private individuals was a huge misstep that was not done in the public interest. I won’t call it a mistake because it was intentional, and done to serve the interests of Wall Street and not Main Street.
There is an emerging trend to move back to defined-benefit plans nationwide. Which one would you choose if offered the choice? There’s a question that benefits itself.
My private sector defined benefit pension plan reduced my benefit by 20.77% in 2011. In 2013, it was further reduced by an additional 39.03%. Next stop: bankruptcy. I very much doubt I’d be worse off today if my pension plan was defined contribution …
“The amount of cash required to fund a retirement is pretty much the same in either er a defined benefit or a defined contribution scheme.” If that was true then the state and all the other employers in PERS and TRS would not have a $7 billion past-due liability. Please read a second time what Suzanne Downing wrote here.
I’m not sure that there is such a trend of stupidity. If a 401 k is good enough for the private sector it is good enough for public employees or are you saying that public employees are to ignorant to handle money like we do.
Public employees are dumber and lazier than Private sector employees, absolutely.
The reason state and municipal governments moved away from defined benefits is that they are too expensive. Even most unions do not have them. If the gov employees want them so badly, let their unions take care of it, not our state. Talk to the Teamsters, they will tell you why they went to a 401k. You don’t always get what you want and hopefully not this.
Most Alaska state employee unions are not affiliated with national unions, so there’s not enough of them to pay into a union pension
Dog; why do you enjoy being on the wrong side of history?
Lets give credit to the late Rep. Mike Kelly who was the one who led the charge to get rid of the defined benefit system. Mike was a good guy, and knew that system was going to bankrupt Alaskans.
This current effort is pure corruption. We have no way to pay off the $7.1 billion dollar debt- and these fiscal morons want us to start going back into debt?
And Giessel looks at this corruption as a way of getting more money for her nasty family.
lol, yeah you sure love your handout every october don’t you? And too good to do what 48 other states do and OMG…pay taxes.
Socialist much?
Time for another Covid booster shot.
Yep, for sure!
Socialist hypocrites. I was one too.
How many of our legislators, who are opposed to returning to a defined benefits plan, are themselves collecting a pension, will collect a pension, or who have a spouse who will collect a pension?
As for the State not being economically diverse enough with the decline in oil production, to that I say, what the fuck have you all been doing? Do your fucking jobs, make the state better.
Lazy politicians…worse than bankers and lawyers.
Now that Social Security will be reinstated to its full amount for public employees, the state does not need the return to defined benefits. Why not match 401K’s instead and give the employee the responsibility for managing his/her own money?
I plead the 5th.
So much for backing the blue, eh? Tier IV’s five year and out vestment makes Alaska a training facility for officers who then leave with their’s and the state’s matching funds and leave for other employment, often in states with pensions.
That’s the game.
The State cannot afford it, pure and simple! If it was a proposed bare bones defined benefit plan it may be doable, but the State has a bad habit of champagne tastes with beer pocket money!
We need to take a closer look at law enforcement. Right now Alaska is a recruit and hire state. One can get hired, outfitted, sent to an academy, and receive field training. This process takes over a year and some don’t make it. After 5 years the recruit is fully vested and lured away by higher pay and pensions. We start all over again and lose a seasoned officer. Wash, rinse, repeat.
Same with educators. Good gig. I was there a lot longer.
I see this all the time
The state doesn’t need to change the plan back. There is a reason very few companies offer a pension. The pro side says it will attract new employees but that is totally untrue. The state, and others, can’t find workers and is 30 to 40% under staffed. A retirement program won’t help that. They need to be competitive in the market and right now a quality employee can expect nearly 50% more an hour in private industry.
How about let’s allow the government workers the right to enjoy the same retirement options as the rest of us…IRAs, 401(k)s, save your own damn money or go without. How about that? And if Social Security is good enough for the working Americans who are actually paying for all this then it’s good enough for our public employees.
It’s a perks, a benefit to get folks to do the jobs. You can do it too.
State employees don’t have social security
Until recently all states had pensions for their employees besides Alaska and North Dakota… until the beginning of the year when North Dakota went back to a pension. Now we are the only one without.
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