OPINION: Alaska shouldn’t change its retirement system

It’s been 16 years since Alaska lawmakers moved away from an increasingly expensive and debt-riddled pension benefit to a more financially sustainable retirement option for public workers and educators. Now, in a purported attempt to stop the exodus of expensive, newly trained public safety personnel, lawmakers are considering a return to a pension scheme based on the same flawed policies that generated debt and budget problems for the state in the past.

When advocating for the legislation launching the state’s current defined contribution retirement benefit back in 2005, Sen. Bert Stedman warned that the state’s then $5 billion in underfunded retirement benefits was a result of “multiple years of compounded errors,” including inaccurate assumptions, a bear market, declining interest rates, artificially low contribution rates, and legislation that increased benefits.

Sen. Stedman went on to say that the Legislature had insufficient and inaccurate information when critical decisions on funding and risk were made. The Legislature today appears to be following the same path with House Bill 55 (HB55), legislation that would launch a new — and risky, as designed — pension system. And, much like Sen. Stedman’s diagnosis of previous bad decisions, today’s HB55 has yet to receive any actuarial analysis of the potential long-term risks and costs associated with such a drastic shift in plan design.

So far, legislators appear to have completely relied on proponents of HB55 for data and context, usually a recipe for bad policy outcomes. The narrative proponents curated around HB55 centers on claims that the solutions being considered in HB55 are well-studied, low-risk and drastically needed to maintain law and order.

Over the years, previous similar attempts to return to a traditional pension benefit for first responders have been reviewed by actuaries, most recently HB79 from 2020. In that report, state actuaries found that, given certain market returns, the Legislature could expect to pay between $100 million to over $1.6 billion in additional contributions over the next 20 years, without a guarantee that all earned benefits will be fully funded. Despite being introduced in February of 2021, HB55 has yet to receive an actuarial evaluation.

The claim that HB55 is low-risk to state and local budgets is a reference to what proponents call new “cost containment levers” like a minimum retirement age, a member contribution rate floor, and a cost-of-living-adjustment that suspends if the new fund falls below 90% funded. But those policies would only be tantamount to a Band-Aid on a bullet wound once markets underperform.

While the COLA changes and a minimum retirement age would be effective cost saving measures, setting a member contribution rate floor along with a rate cap like HB55 suggests simply ensures all future fund underperformance beyond the cap will be placed on the backs of state and local budgets.

Capital market forecasts expect well below 7% returns over the next decade and other pension systems are rapidly lowering their investment targets. By doing nothing to reduce the current 7.38% assumed rate of return, HB55 stands out of step with recent state-level trends and makes the scenario where rates exceed the member cap much more likely. More concerning, the limited analysis available on the potential costs of the reform are relying on that same overly optimistic rate.

Finally, to maintain law and order, the state must have the ability to effectively recruit and retain qualified public safety personnel. The retention challenges facing the state in this regard are nearly identical to challenges reported by public safety leaders in almost every other state in the country, all of which have continuously offered some type of traditional pension benefit as a benefit. There is no data to support the expectation that offering a pension benefit will have any impact whatsoever on retention. Other states offering public safety pensions have the exact same issue today, as do teacher workforces, public agency workforces, and even the private sector.

Notwithstanding anecdotal proponent testimony, academic research suggests that retirement design is not a powerful motivator to public workers; rather, working conditions and salary tend to drive individual decisions to start, continue or change careers. Early career new hires specifically tend to focus little on retirement offerings themselves relative to the entire package of salary and benefits.

Opening a new tier in the previously closed public pension system would move the state back from its current risk-free retirement design for new public safety hires and expose the state to the same types of unfunded liabilities that prompted closing the pension fifteen years ago. HB55 as designed does not adequately mitigate financial risk to governments, which makes the current proposal a risky gambit for Alaska in the current, volatile economic climate.

Lyda Green, a former Alaska legislator, served as president of the Alaska Senate from 2007-2008.

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