Rep. Kevin McCabe: Defined benefit, golden handcuffs, and HB 22’s hidden fiscal dangers for the future state budget

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By REP. KEVIN MCCABE

With defined-contribution plans, employers promise to invest a certain amount of money each year. Defined contribution promises are short term, just a year at a time, and the employee is responsible for managing his or her account. 

A defined benefit plan, however, is a promise to employees to pay them a set amount, in retirement, no matter what the performance of the actual investment is. 

The problem with a defined benefit plan is that the amount an employee is guaranteed for retirement has little relation to what the employee puts in. The employee’s pension benefits are based on his or her final salary – which is often plussed up by overtime work at the end of a career – not on how much the employee contributed over his or her career.

We have all heard defined benefit employees saying. “Sorry, gotta work overtime, I am in my high three years.” 

With defined-benefit plans, employers also promise to top up the accounts if their investments don’t perform well enough to cover the agreed payouts. That is reassuring for employees. But what it all means to Alaskans, in aggregate, is that an employee earns far more in benefits than the employee ever contributed. Where is the money going to come from? The difference must be made up by the employer…. and what happens when the employer can no longer fund the plan? Do they shed it like a pair of dirty coveralls or turnout gear? 

Then who suffers? The 70-year-old retiree who can no longer get a job? The person who has worked for many years to get to the point where he can retire, who maybe has slowly used his savings and retirement for 10 years — who now has neither?

Personally, for me, I would rather have control of my own retirement than leave it for future legislators, bureaucrats, or a bankruptcy judge.

Consider, as well, that the top-ups may be needed years or even decades later. If an employee starts work for the state at 25 and retires at 65, his or her first pension check won’t arrive until 40 years after the first paycheck. That’s a very long-term promise, and it consequently presents some risks for employees.

The first risk is that the pension payout money might not be there when needed. Defined-benefit plans should pay retirees better than defined-contribution plans during economic downturns. But downturns are exactly when the state is least willing or able to top up their plan. Also consider that 40 years covers about 10 Senatorial and Governor election cycles and up to 20 House of Representative cycles. Will all those politicians and the bureaucrats they hire keep their predecessors’ promises through thick and thin?

Because they didn’t in Detroit. To squirm out of bankruptcy in 2014, Detroit politicians cut existing defined benefit pensions by almost 5% and eliminated other benefits entirely. Some benefit loss was even retroactive – retirees had to give money back as well as pay for health care plans. Could you afford a 5% decrease in your fixed income when inflation is headed above 10%?

In 2011, Rhode Island officials realized that they had saved only 56 per cent of the money needed to fund Rhode Island’s pension promises; Their defined benefit plan. To avoid disaster, they spent four years overhauling the state Defined Benefit plans. Retirees past and future lost some of their supposedly “defined” benefits.

The second risk with defined-benefit pensions is that employees (or their spouses) might not be there to receive them. The pension formulas typically set thresholds for calculating payments, based on age and/or years of service.  If you stick around long enough, you receive the full defined payout. The spousal benefit is typically an election; but what happens when both spouses pass away? In that case, the defined benefit money goes away. In a defined contribution scenario, however, the money in your account is yours and can be easily willed to your survivors. 

Defined benefit pensions are sometimes called “golden handcuffs.” They penalize people who switch employers too soon. Golden handcuffs refers to any benefits offered to an employee as an inducement to continue service. The meaning can be both positive and negative. In a positive spin, companies invest significant resources in the hiring and training of employees. In the negative, they may keep people around just waiting to meet some threshold or “high five” requirement.

Let’s face it, HB22 is designed handcuffs on police, EMS, and firefighters. It is designed to be an inducement to remain on the job. My question to Alaskans is this: Where is the money going to come from?

There will be public testimony on this bill in Community & Regional Affairs Committee at 8 am Tuesday, Jan. 31. You can testify on this bill through these methods:

https://akleg.gov/pages/testify.php

Phone numbers:

  • From Juneau Prefixes: 586-9085
  • From Anchorage Prefixes 907-563-9085
  • All other Callers (Toll Free) 844-586-9085

Rep. Kevin McCabe serves in the Alaska House of Representatives for the Big Lake area.

22 COMMENTS

  1. It is my understanding that Alaska’s Iron Workers Local 751 members voted to reduce their present pensions by 75% to keep the pension solvent. To me, this is similar to falling on Their sword after not “grabbing air” during an extremely dangerous livelihood.

  2. Rep. McCabe is spot on. We simply can not afford these expensive defined benefit pension plans. The Alaska population is declining as we’ve been dealing with the multi- billion dollar obligation we already had to the old Tier 1 2,3,4 defined benefit systems. Adding even greater obligations is fiscal suicide. Why? The Alaska Constitution guarantees these pension schemes. Do Alaskans really want income taxes, and a sales tax? We are already giving away billions of dollars of our oil annually. This reckless greed needs to end.

  3. The author points out the failure of Detoilet and Rhode Island as reason to against a pension system for state workers. Detoilet is the worst possible case for everything wrong with government and Rhode Island is a typical tax and spend state. There are states that have fully funded pensions or have met those obligations. I would imagine that the Alaska legislature would opt to spend any money that would be directed to a pension system if approved and kick the can down the road for someone else to deal with if a new tier was approved. Lawmakers can rarely keep their hands out of the people wallet, just look author they stole PFD money for pet projects. The author does not mention the lack of fiscal responsibility for legislators. If the state can retain workers without having to hire and retrain all the time, which can be costly, then it can be good for Alaska if properly managed.

  4. My understanding is that private employers must fund TODAY the expected payout of pensions in the future. This may be not be accurate, but it is an estimate that goes into profit and loss. Government accounting is not accrued for the future, but is accounted for in the year it is paid out. Therefore, there is no current accountability when deals are made when it is government. So, the government (usually the same folks who are receiving campaign money from the unions) can negotiate pensions that are not affordable for government unions with no consequences. When it comnes time to pay, it is a new set of govt folks who can simply blame the previous folks, but then also continue to offer more. It should be, at least, accountability now. Not later.

  5. “Where is the money going to come from?”

    My question is “Where is the money going to come from to address the State of Alaska’s current unfunded pension liability for PERS/TRS at 6 BILLION dollars?” PERS current defined benefits program STILL has unfunded pension liability of 4.6+ BILLION dollars. “…it is important to note that these results do not include potential impacts on the legacy PERS tier and its current $4.6 billion in unfunded liabilities.”
    ADD TRS to the mix: “Unfunded pension liabilities for the Alaska Teachers’ Retirement System (Alaska TRS) total $1.86 billion.”

    That is over six (6) BILLION dollars (give or take a few $$$) in the red regarding the State of Alaska’s unfunded liabilitites for PERS/TRS programs. Don’t have any answers – just more questions for others to answer.

    FYI: Alaska Constitution. “Membership in employee retirement systems of the State or its political subdivisions SHALL constitute a contractual relationship.  Accrued benefits of these systems SHALL NOT be diminished or impaired.” No reducing of present (current) pensions without constitutional amendment. Can’t vote your way out of these liabilities.

  6. Where’s the money going to come from you ask….. a mentally challenged monkey could figure that out – a severely reduced PFD with a state income tax. If that’s not enough they’ll include a state sales tax. It’s all been coming and it’s getting closer with every election cycle.

  7. If not through enhanced benefits what does Rep. McCabe propose to attract and retain public safety, teachers and government employees?

    • It is the rarest 20-something who is giving the slightest thought to retirement. They want beer and date money for friday night. It is a whole lot cheaper to put up signing bonuses, raise the pay scale and the like than to commit to the obligations of a defined benefit retirement plan. NO defined benefit plan has been able to keep up with the federal reserve’s inflation policies.

      Alaska has some competition from mostly union/Democrat states that maintain defined benefit, hoping for that Democrat savior from the sky to bail them out. They dangle a defined benefit plan at Alaska employees. It’s a gamble; maybe the plan will survive until they reach retirement, maybe it won’t.

      • So you drank and and dated in your 20’s Art.

        In my twenties I went to work professionally specifically to create a retirement account.

      • In your twenties you may have drank and dated. In my twenties, I was married, a father of four, and working as a Correctional Officer for the state. And I WAS worried about my future and my retirement. In the last five years of service to this state I’ve watched dozens of C.O’s at my facility alone quit once vested in the Tier IV Defined Contribution, with many leaving to work the same job in states with pensions. As it stands, my facility is suffering from a major staff shortage, causing forced overtime, exhaustion, low morale, and even for people leaving for those greener pastures. This is a huge safety concern, and being able to recruit and retain high quality officers with ensure the saftey of not only our staff, but Alaskan Citizens alike. I support this bill!

    • Frank, Many people from different walks of life pursue careers for reasons other than just “enhanced benefits” , meaning, they teach, build, fly airplanes and keep the peace for reasons other than their pension plans. Something within drives them to excel at their jobs. Service to others? Personal Satisfaction? I mean, look at the Marine Corp. the vast majority of them never get a pension. I suppose many jobs are a calling, and those that are best at doing these jobs feel a call on their life. Over the years I’ve noticed that the worst guys in every union hall where I was a member were crappy at their job while always nit-picky about pay and benefits.

  8. The article is misleading when the author states that a defined benefit plan is based on the employee’s final salary and not on actual contributions or actual fiscal performance of the plan. Only State defined benefit plans use that formula. I am retired out of an Alaska construction union and the plan is in trouble and has been for years now because of poor stock & bond returns. The Union has been forced to make difficult financial adjustments to the plan to keep it solvent. Unlike the State defined benefit plans we cannot go to the legislature with hands out demanding a State treasury bailout! I am all for State workers having a defined benefit retirement plan, but they should not have the luxury of having the rest of the State bail them out when things inevitably take a downturn in the stock and bond markets. I believe that the State has already helped out the teachers union several times to the tune of hundreds of millions of dollars! No more!

  9. Highly qualified law enforcement costs money. Plain and simple, especially today. So don’t got claiming you support your local law enforcement if ultimately you vote against pensions in favor of a fatter PFD.

    • The choice is not “ruinous unsupportable pension plans” or “no employees”, no matter how much the unions would like to present it as such.

      I’d have little problem with examining the basic pay scales, to enable the individual employee to take responsibility for their own retirement choices; like most private sector employees somehow manage to do without putting their children, and their children’s children, on the hook for the benefit of a minority of the population in perpetuity.

    • You can spew BS to your heart’s content, but here are the facts. An AST recruit has to have a GED or HS Diploma, and be able to pee in a bottle and pass a background check. If offered job, s/he has to pass a psych eval and pass some undemanding physical tests.. The job starts at $77K/yr. Those same MQs get you a Range 10 clerks’s job elsewhere in State government.

  10. Christ is king. Not money. Dismiss that at your peril.

    Follow the siren song of defined benefits should they come to pass, and reap the harvest of the corrupted souls that will deny ‘your’ pension money when you need it. Its nearly guaranteed.

  11. I recieve a pension from the IBEW state,national and international organizations and joining the union with its defined benefit pension plan was one of the best decisions I ever made in my life!! It is managed by the Alaska trustees and they do an excellent job!! Each and every month that money just rolls in and it expect it to do so for the rest of my life unless the government somehow gets control of the pension fund and ruins it, but for now it is privately managed. In our union the EMPLOYER AND ONLY THE EMPLOYER funds the entire amount. And the employer is given very little slack in keeping up with their contributions to the fund!! I was at The ANTHC hospital during mid construction and the local employer contractor had missed his contribution window. All the electricians were pulled aside and informed of this development and told that we could expect to do a walk out if this obligation was not met. The large General Contractor quickly stepped in when they were informed of this development and offered to make up the shortfall so as to avoid a work stoppage!! Of course they were in a position to withhold part of their payments to the contractor in order to be reimbursed!! And of course, this was a small amount to them. But another time a contractor that I had worked for years previously was found to have not reported correctly all the hours they had employed me and thus had not paid completely the contribution required of themThey had gone out of business and there was no way for the union to recover this amount so the union covered this shortage withtheir own funds including the penalty!!

  12. Armed services of this country no longer have a defined retirement. Changed about 5 yrs ago. It’s now called blended retirement and is 401k based when you do retire you at 20yrs you get 26% of your base pay. Then wait until you are 59 1/2 to start drawing your 401K. GS civilians haven’t had a defined retirement in years they do 30yrs they retire and they get 36% of their base pay rest comes from TSP/401K. So why is this state going backwards? What makes a public employee any better than a private sector employee who’s entire retirement is 401k based.

    • jw – If an employee is guaranteed 26% of their salary at retirement , in my opinion, that would be a defined benefit pension plan. The reason being that the individual would know that at a minimum they would get at least that 26%. However, if an employee’s retirement plan is financed solely by a 401k, then his annual retirement income could be all over the spectrum depending on the vagaries of the stock & bond markets and, in my opinion, that would definitely be a non-defined pension plan!

  13. Before you declare something as a State Problem, ascertain were the service is used. Are State Troopers in the Mat Su Borough a State Problem that needs state resources ? Why not a Sheriff’s Department funded by the Mat Su Borough ? Anchorage has no State Trooper coverage. Plenty of expensive houses in Bethel and Delta Junction. Why no property taxes for schools ? Lots of great observations. But if you believe in small government, you have to support it and have local funding. For many years too many have called local problems state problems. Time to change that tune.

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