By WIN GRUENING
The Alaska Legislature’s Senate Finance Committee met on February 23 to begin examining issues around state retirement systems and workforce recruiting and retention. The public hearing was prompted by concerns that state and municipal governments are experiencing high employee turnover rates. Furthermore, attracting qualified applicants has become increasingly difficult and many positions remain unfilled.
Some legislators and employee unions are promoting the idea of reintroducing an expensive legacy state pension plan in hopes this will magically fix the problem. But promising public employees a guaranteed lifetime income upon retirement under this plan would introduce major financial risk to state government, municipalities, and local taxpayers.
Employee retention and hiring is a nationwide problem, not just one peculiar to Alaska. Furthermore, it is not limited to public employees but exists in the private sector as well.
The Covid-19 pandemic triggered enormous turmoil in the U.S. labor market, in both the public and private sectors, with repercussions that will be felt well into the future. Widespread job losses early in the pandemic created tight labor markets that still persist today.
It’s fair to ask the question, though, should Alaska return to an enormously costly retirement system for government workers with long-term financial implications in order to fix a problem that may not exist five or ten years from now?
In 2006, the State of Alaska moved from one type of retirement system (defined benefits pension-DBP) for state and municipal employees to a 401(k)-style retirement plan (defined contribution retirement-DCR). The reason for the change was the large accumulation of unfunded liabilities caused by structural under-funding of retirement plans and the stark realization that Alaska’s defined benefit plan, as designed, was unsustainable over the long term.
In the first meeting of what will be a lengthy process, Senate Finance Committee members listened to a presentation by the Division of Retirement and Benefits that compared Alaska’s current state retiree plans with its legacy plans that were discontinued 17 years ago.
Today, proposals to re-institute a similar DBP system for some or all government employees would be extremely risky, considering the private sector has moved steadily away from this model and more state governments are eying reforms that limit risk.
Alaska’s experience with the previous plan should be warning enough. No new employees have been enrolled in Alaska’s discontinued defined-benefits-plan for the last 17 years. Yet the plan has required and will still require massive infusions of government cash for decades to make it financially solvent enough to pay out benefits to existing employees and beneficiaries for another 70+ years. (Alaska’s accumulated unfunded pension liability estimates range anywhere from $7.8 billion to $31 billion, depending on interest rate assumptions used).
Consequently, state and municipal level officials are looking at other options. At a recent Senate Labor & Commerce Committee hearing on workforce challenges, Jeff Rogers, Juneau City and Borough Finance Director, summarized some of the actions Juneau has implemented or is considering for employees:
- – $5,000 annual stipend for childcare
- – Hiring bonuses up to $40,000 for critical positions
- – Enhanced employer match for employee retirement contributions
- – Expansion of retention bonus program
- – Work from anywhere 3 weeks/year – work from home 2 days/week
- – Bring infants under 6-months-old to work
- – Allow pets in employee offices
- – Student loan or tuition assistance
Some of these incentives or policies might have been unthinkable five years ago. They may be viewed by many as unworkable or expensive, but they have one significant advantage. They address hiring and retention issues without increasing current unfunded pension liabilities and re-exposing state and municipal governments (and local taxpayers) to the obligation to pay ever-increasing retiree benefits in perpetuity.
In the modern world of work, the idea of a ‘job for life’ is becoming increasingly outdated and irrelevant. Millennials and Generation Z have different ideas about what benefits they value in the workplace. There are many reasons why an applicant might accept a job offer or why a current employee would leave their job. But we should not assume that what worked 20 years ago will work today.
In the coming months, Alaskans will hear about ideas under deliberation. In considering changes, the Legislature would be wise to include those that share the financial risk equitably between employer and employee.
After retiring as the senior vice president in charge of business banking for Key Bank in Alaska, Win Gruening became a regular opinion page columnist for the Juneau Empire. He was born and raised in Juneau and graduated from the U.S. Air Force Academy in 1970. He is involved in various local and statewide organizations.
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They know we can’t afford this. They don’t care. It’s about votes, right now.
You could offer employees the moon, but it would make no difference. People do not wish to work. That’s the problem. I closed my business because I couldn’t find entry level employees willing to work at even three times the minimum wage. I am not the minority in this, it’s a national problem. Post Covid has left us a zombie work force. Everyone is handicapped.
Alaska’s unfunded retirement system was created by a blunder in the system by those required to determine amounts to be collected. Alaska took them to court and Dan Sullivan settled for the amount that gave us this unfunded amount that may/may not have been successful. He thought it a good deal but anybody’s guess how it would have turned out.
Win says a defined benefit plan has this same risk of unfunded liability but not likely. Dan Sullivan is no longer our AG.
This is a way for the Alaska Legislature to deficit-spend without the state financial statements showing even one dollar of the immense liability being incurred. As a matter of fact, the Legislature could enact this new and generous defined benefit plan even as they accuse the Governor of deficit spending. This is the Legislature playing a shell game supported by most of the Alaska media, the Alaska Municipal League, and the public employee unions. A very real peripheral casualty is the private sector that has to compete with state and local government to attract employees. What could save the state is that the current Governor doesn’t have to run for re-election so he can do the right thing and veto this bill!
State employees who will have the option of converting their defined contribution retirement savings to defined benefit if this bill becomes law will hire actuaries to evaluate how much this new defined benefit system will cost the state and the municipalities. So it’s the safest of bets that the actuaries will make assumptions that will show the new tiers to be cost-effective and actually save money. Again, this is a shell game.
I like the idea of bringing my dog to work however. And I might add to the list bringing my gun to work; always have done that but making if official would bring Alaska the respect of other states.
Those defined benefit plans were not really all that expensive. What got the State in trouble with them was decades of knowingly massively underfunding them.
What I hear from state employees, be it engineers or craftsmen, is that the state of Alaska is no longer a good place to work. Lack of wage increases is part of the issue and an equally big complaint is that recent exempt and partially exempt positions are being filled by unqualified people that seemingly meet certain woke criteria. I haven’t heard much complaints about the 401k-style retirement system, just pay and working conditions.
One way or another the public unions want the PFD. They act like it is theirs. The politicians are trying hard to keep paying their voter base to get votes. Well some day reckoning will come and these theirs will be called on.
Win Gruening is “spot on” regarding that Alaska cannot revert back to a pension system which will go bankrupt. As a business owner with employees I concur with his analysis. As a legislator in the 32nd session I had many people come to my office promoting a return to defined benefits vs defined contribution. With my 15 minute hour glass I would engage the conversation first explaining that the hour glass represented defined contributions. The metaphor of the proposed defined benefits was an hour glass with many holes in it, which the sand would spread out and require an extra infusion of sand at the top. Some suggested defined benefits with a life insurance policy. Others proposed that dependents get privilege upon the death. Others suggested a defined benefit that would be re-defined upon retirement. I often asked what is the probability age of retirement and longevity calculation of anticipated death to make it work? What happens if longevity exceeds the calculated probability? What happens if the 60-yr-old employee marries a 26-yr-old who claims benefits well past the calculated death formula due to being a dependent recipient? Are unions responsible toward the infusion of funds necessary to keep defined benefits functional? By the end of the discussion the defined contribution hour glass would be completely full at the bottom which the recipient would have full control and pass on inheritance. On the other hand, the defined benefit would be depleted, a mess, and demands of entitlement stating the government did not do its part.
We do need a strong workforce in Alaska both in private and government sectors. Creative ways to encourage a workforce should reflect on Maslow’s Hierarchy of need which starts with reasonable housing, food, and living costs. An attainable secondary education / workforce partnership system with industry certified students starting at the age of 14 and ready by 17. Longevity incentives like modified lease on housing which 20-year longevity employees will be given the title. A workforce with understood purpose of the whole rather demands of the individual. A workforce which all are contributing to the success of the whole rather requiring some to feed the demands of the few (e.g. defined benefit, perpetual welfare, perpetual unemployment benefits, etc).
Currently I am in South Asia visiting and inquiring of workforce programs. It is amazing how many people are eager to work and would jump at the opportunities, which Alaska employers are pleading to just get employees for hourly wages. Thomas Sowell described it will that Basic Economics encourages creative problem solving to move goods / resources. Maybe another solution to the premise of government is to contract to private industry to accomplish the fundamental tasks for the benefit of Alaskans as a whole.
The defined benefit system had several flaws: 1) employees are living longer, increasing benegits paid out without increased payment into the retirement fund.
2) The dollar amounts paid into the fund for each employee was insufficient. 3) The estimated earnings of the fund was over estimated.
Interest and earnings were quite high in the mid ’80’s so they raised the anticipated earnings rate, from something like 5.5% to 8.5%. Drastically reducing the amount employer’s and employees pay into the fund to earn enough to pay benefits out for the life of the employee.
One option to retain the old defined benefit system was to change the assumed rate of return. While it sounds simple enough, the actuarial math drives the cost up dramatically. So much so that Municipalities claimed they would be bankrupt.
Municipal employees are also part if the State Public Employee Retirement System (PERS).
Dont forget State employees also have two added retirement benefits: 1) Supplemental Benefits System, a required contribution to a tax deferred retirement system where the State adds 15% contribution. 2) Deferred Compensation, an optional IRS (527?) retirement program. Both of these are slightly different from a 401k, but add up substantially. On retirement today, these two benefits should add up to well over $1 million in cash. (Not all contribute to the Defined Benefit, but that’s an employee choice to reduce their retirement benefit, not the State’s.)
Bottom line: The existing payments to Defined Contribution employees costs a few hundred million each year. Bringing it back would put Alaska in the terrible position Illinois and others are in. Alaska would be at risk of bankruptcy.
Even more so today, knowing we have only one tax base, oil, and a global effort is underway to step away from oil. Leaving Alaska with no tax base. Zip, nada, nothing.
It’s not like commercial fishermen want to pay more taxes when there is no more oil subsidy.
It’s hard to take any of this serious when the Executive Branch and the Legislature have proven they have zero interest in fixing current corruption problems with existing leadership within the Executive Branch. The problems with unqualified and incompetent leadership have caused massive problems with the retention of skilled staff who simply cannot tolerate arrogant and incompetent leadership. Governor Dunleavy is fully aware of these types of problems, and so are many in the Legislature. However, no one cares.
Throwing money we don’t have at this problem is not a solution. If any of our elected officials were actually serious about the recruitment and retention problems, they would start fixing it by investigating and correcting known problems of corruption and incompetent leadership and fix them. Many employees would stay if they were happy in their positions. The fact that this isn’t even being mentioned by our elected officials is telling.
There is a problem in law enforcement. We are a 5 and out state. We spend millions on recruiting, hiring, training, outfitting. When we have a seasoned officer and they hit that magical 5 year mark, off they go to greener pastures (Alaska is a known area for law enforcement agencies looking for lateral transfers). I’ve heard many say if we had a pension, they’d do another 20 years. We see what happens in other states when law enforcement dwindles to near nothing. Crime will be rampant and 911 will be a perpetual busy signal.
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