Why in the world would a state in its right mind, after pounding a stake through the heart of its costly, underfunded defined benefit pension plan, even toy with the notion of bringing it back to life?
Despite anything vaguely resembling common sense, Senate Bill 121, which would allow state workers to choose between a traditional, anachronistic defined benefit pension plan already $11 billion in the red, or a defined contribution plan such as a 401(k), is perking along in the Alaska Senate. The state's public employees and teachers unions must be ecstatic. The average Alaskan? Not so much.
About 26 percent of Alaska's roughly 35,000 state employees -- not including workers at the 160 or so other government employers in the state -- have been in defined contribution plans since 2006, as the Legislature, after a fierce fight, curtailed new enrollments in the traditional pensions. The Senate bill would allow them to choose which program -- defined benefit or defined contribution -- they want. Any guesses which they would choose?
Gov. Sean Parnell rightly opposes the Senate measure, saying it makes promises Alaska would have to keep for 70 or so years. While future revenues already are in doubt, Alaska today antes up hundreds of millions annually from its general fund to underwrite defined benefit plans. It would take an estimated $141 billion to eventually pay off all those 70-year promises -- and that's if nothing changes. Alaska is not alone. States across the nation are wrestling with prickly pension problems by slashing benefits, trying to create new pension hybrids or imposing layers of restrictions and restructuring, the National Conference of State Legislatures says. In 2010 alone, 21 states enacted such changes.
It has been a long tough road for most. The conference says in 1999, 126 statewide retirement plans (including the District of Columbia) had 103 percent of accrued actuarial liabilities. That was before the meltdown and inadequate state contributions. For 2009, analysts at the Boston College Center for Retirement Research estimated "the average funding ratio for the same 126 plans was 78 percent."
Any financial picture is guesswork because of myriad methods states use in valuing assets and overly optimistic estimates of investment returns. But states do not fret too much. If there is a problem with liquidity, they can always milk taxpayers. In Alaska, we are socking away "surplus" revenues generated by a near-criminal oil tax. When that ends, when the money is gone and if we are stuck with the Senate's plan, the fiscal pain will be exquisite. Who will pay?
Defined benefit plans have fallen out of favor like grim death in the private sector. Only 30 percent of Fortune 100 companies offered a defined benefit plan to newly hired employees by the middle of last year; that percentage is expected to continue dropping. In 2008, it was 47 percent; 10 years earlier, 90 percent. The downward spiral is evident. They are fiscal anchors.
Governments, too, feel the pension pinch. While the standard estimate for the underfunding of pension plans was thought to be about $1 trillion, the University of Chicago's Robert Novy-Marx and the Kellogg School of Management's Joshua D. Rauh estimate the national unfunded pension liability is several times larger than all outstanding municipal debt -- somewhere between $3 trillion and $4 trillion. There were -- are -- questions about whether they will meet retirees' needs in 15 years.
Alaska's PERS/TRS retirement systems, with about 70,000 members, active and retired, are $11 billion in the red, driven there largely by increased health care costs -- which have doubled in a decade -- investment losses and various forms of alleged negligence. The Anchorage School District alone has a $120 million deficit. Anchorage? Perhaps $100 million.
Despite that, some in the Alaska Senate beholden to public employee unions unbelievably still want to hobble the state again with a costly pension plan largely abandoned by the private sector -- for good reason.
Sponsors of SB121 include Democrats Dennis Egan of Juneau, Hollis French, Anchorage, Joe Paskvan, Fairbanks, Bettye Davis, Anchorage, Albert Kookesh, Angoon, Bill Wielechowski, Anchorage, Johnny Ellis, Anchorage, and Joe Thomas, Fairbanks. Two Republicans also jumped aboard: Lesil McGuire of Anchorage, and Linda Menard, Wasilla.
One would think letting sleeping dogs lie is best in the case of the defined benefit plans because a 70-year promise may be hard to keep.
That is, if you expect to keep it.
Paul Jenkins is editor of the Anchorage Daily Planet.