Senate majority introduces plan to overhaul Alaska’s public retirement system

Alaska Senate majority members on Wednesday unveiled a new policy proposal to revamp the state’s public retirement system, in an effort to address growing challenges in recruiting and keeping public-sector workers.

The bill would create a new pension plan that would promise state workers predictable payments upon retirement. It’s a departure from the retirement plan adopted in 2006, which allows workers to contribute each month to a retirement account, but makes the amount available to them upon retirement dependent on the success of their investment strategy.

Labor groups have said that retirement plan is a key factor causing working-age Alaskans to leave the state and stopping workers from moving to Alaska. A new analysis presented in February by the board managing public retirement accounts found that most public employees covered by that plan do not have enough savings for retirement.

Members of the bipartisan Senate majority say that the 2006 move from what is called a “defined benefits” pension plan to a 401(k)-style “defined contributions” plan, has contributed to difficulties in recruiting all manner of state workers, including teachers, bus drivers, attorneys, administrators, biologists, prison guards, police officers, firefighters, and heavy equipment operators.

“Basic services are inadequate around the state,” said Senate Majority Leader Cathy Giessel, an Anchorage Republican who authored the new proposal. “That’s the problem we’re trying to address.”

Giessel said other policies to address worker shortages, including hiring bonuses of up to $25,000 for new state troopers, are expensive and ineffective.

“Without a defined benefit plan and a Social Security plan for teachers, we are not competitive among other states,” said Giessel.

[Earlier coverage: Alaska public worker shortage fuels renewed interest in pension plan]

Senate majority members said a return to defined benefits is sought after by private sector leaders, who say they need more dependable state services to advance resource development projects and other business priorities. But the proposal’s biggest champions are union leaders and labor advocates.

“We’ve never had that before where either the House or the Senate have said, ‘this is our priority,’” said Chuck Kopp, a former legislator who now works as a consultant and leads the Alaska Public Pension Coalition, which brings together public employee groups and unions to advocate on retirement issues.

‘Not your grandma’s defined benefits’

The measure, Senate Bill 88, comes more than a month into the four-month legislative session, as lawmakers have heard repeatedly from public and private sector leaders about the impacts of Alaska’s worker shortage and how a revamped retirement offering could improve the state’s competitiveness. Alaska is the only state in the union that offers public workers neither a defined benefits plan nor access to Social Security.

Opponents of a return to defined benefits have long pointed to the conditions that led the Legislature in 2006 to cancel the offering for new workers — millions of dollars in unfunded liability for the plans that the state is still paying off, more than 15 years later. A new plan, opponents say, could too easily fall into the same trap.

But advocates for the new proposal say the plan was built with safeguards meant to prevent the state from taking on a greater commitment than it can afford.

“This is not your grandma’s defined benefits plan. It’s a whole new system,” Giessel said at a news conference on Tuesday.

Heidi Drygas, director of Alaska’s largest public employee union, said the proposal “is a fair retirement for employees, but is not a Cadillac plan.”

“It’s by far, I think, the most modest plan that the Legislature has seen since it turned to a defined contribution plan in 2006,” she said.

The proposed plan would create a new defined benefits tier and allow public workers currently on the defined contributions plan an opportunity to switch to the new tier.

To ensure the plan remains solvent, the new tier would not include health insurance for workers upon retirement, leaving them dependent on savings and Medicare once they stop working. Employee contribution amounts could be adjusted by the board that manages the retirement plan if the stock market sees a downturn. And it would allow the board to withhold inflation adjustments to retiree payments if the plan is less than 90% funded.

“This new system will share the costs and the risks between both employees and employers,” Giessel said.

That makes it far less generous than the retirement plans offered by the state before 2006. Several state lawmakers who had public-sector careers have said they are still benefiting from the advantages of beginning employment with the state before 2006.

Senate members said Wednesday that a conservative plan offering dependable pension payments is better than the alternative of uncertainty that is driving workers to nearby states, most of which offer some form of defined benefit.

Kopp said that constructing a plan that does not include retirement health care is “a smart way” to deal with the potential fiscal uncertainty. But that comes at a price for retirees.

“Is that a concern for employees? Yes. Many people would say this is not very employee-friendly,” said Kopp. The plan would allow workers to contribute to a health reimbursement account while they work, which they could then use to cover the costs of health care plan premiums until they become eligible for Medicare.

“So it’s not an employee enrichment plan at all, but we believe it provides a minimum safety net, and as long as the employees still engage in active savings and personal investment, they can be far better prepared than what they are now.”

Sen. Bill Wielechowski, D-Anchorage, said the proposal “is not an extremely generous plan by any means at all.” Sen. Jesse Kiehl, D-Juneau, said “there is nothing gold-plated about it.” Both still lauded the plan’s ability to offer better benefits while — they predicted — incurring no additional costs to the state.

“I know there are some people out there who are going to try to scare people and say this bill is going to cost a lot of money. I think those perceptions will probably change when the actuarial numbers start to come out,” said Wielechowski.

Wielechowski and Kiehl both predicted the bill could end up saving money for the state by managing retirement funds more efficiently.

The bill replaces a proposal put forward earlier in the session by Kiehl, whose original measure would have given workers the option to choose between a defined benefits plan and a defined contribution plan. Giessel’s proposal would require all new workers to enter a defined benefits plan.

“Ultimately, Sen. Giessel’s bill I think is going to cost less while still providing a guaranteed pension check when someone retires, which I think is a critical element,” said Kiehl. “This is a responsible approach.”

‘Discussed, analyzed, bantered’

Despite the bipartisan support for the legislation in the Senate, lawmakers acknowledged the bill could have a tough path in the more conservative leaning House, where a narrower defined benefits bill is stalled.

Rep. Andy Josephson, D-Anchorage, proposed earlier this year a measure to create a new defined benefits plan just for public safety workers. The House State Affairs committee — one of four committees assigned to review the bill — has yet to schedule a hearing.

“The House majority is less inclined to want to cover everyone with a defined benefit than the Senate, by a lot,” said Josephson on Wednesday. That makes his bill more likely to gain traction than the Senate’s. But it’s not guaranteed, as conservative members of the chamber have pushed back against the value of the proposal.

Asked Tuesday about criticism levied against her caucus for its slow movement on proposals relating to education funding and pension overhaul, House Speaker Cathy Tilton, R-Wasilla, said the chamber is focused on crafting the state budget rather than specific legislation.

“I’d like to see it done in one year, but I know all the problems that we’re facing,” said Senate President Gary Stevens, R-Kodiak. “I can’t guarantee you this is something that we can do this year. In fact, I can say it’s going to be very hard to get it through this year.”

A spokesman for Republican Gov. Mike Dunleavy said the governor agrees “Alaska is in a very competitive world regarding recruitment and retention of state workers.”

“Anything and everything should be explored to have an advantage in recruiting and retaining new employees. For example, we need to know if child care options or other incentives can work as well or better than a defined benefit plan,” spokesman Jeff Turner said in an email, adding that the governor “wants more data that demonstrates how well a defined benefit plan will attract the most highly qualified candidates without increasing the unfunded liability created under the previous defined benefit plan phased out in 2006.”

“The governor is taking nothing off the table and wants to ensure that any item used to address this issue is sustainable and durable,” Turner said.

Drygas, who leads Alaska State Employees Association, said “it would be better for the state of Alaska” if the Senate bill passed this year.

“What we’re proposing is not novel. It is a modest proposal. Is it complicated? Yes. But this is something that has been talked about, discussed, analyzed, bantered for more than a decade in the Legislature, and if we really want to fix recruitment and retention problems, I think it would be in Alaska’s best interest to pass it this year. But we know this is going to be a long process,” said Drygas.