Alaska editorial: Wait to fix retirement obligation problem

Posted: Tuesday, May 03, 2005

This editorial appeared in Friday's Anchorage Daily News:

Senate Bill 141, now working its way through the state House of Representatives, would make a sea change in the way Alaska provides medical and retirement benefits to its workers. It's worth taking another year to get it right.

In simple terms, the proposal would change the rules for all members of the Public Employees Retirement System and the Teachers Retirement System hired after July 1, 2005. Instead of defined benefit programs, the new hires would participate in defined contribution programs.

The difference is that in a defined benefit program, which public employees and teachers have now, the state promises to pay benefits according to certain criteria and schedules. The state has a contractual obligation to meet these obligations, no matter how large; the Alaska Constitution guarantees as much to those who work for the state.

In a defined contribution program, employees and employers (the state or municipalities, boroughs, etc.) would contribute to a professionally managed investment account. Each individual would retire with a certain amount in his or her account. The market, rather than a contractual obligation, would decide how much an employee retired with.

In the defined benefit plan, the state takes the risk, because its obligation is writ in stone. In the defined contribution plan, the employee takes the risk, because there is no guarantee.

Why make the change? The state has to do something about an estimated unfunded liability of $5.7 billion in retirement and medical obligations. And the state has to do something about health costs that are driving benefit expenses ever upward and taking an increasing share of local and state government budgets.

We can't go on the way we're going; as Sen. Bert Stedman, R-Sitka, says, the more state and municipal money is soaked up by retirement and medical obligations, the less we have to spend on teachers, police and firefighters. Municipalities are seeing larger shares of their budgets going toward retirement and medical costs, putting the squeeze on other services and intensifying calls for state help. They want some predictability and cost control.

But there's a flip side: As both public safety and teachers organizations argue, offering a less attractive benefits package will make hiring and retaining good people tougher. How much tougher? That's not clear.

And what about the specter of benefits that run out on a future retiree before he or she runs out? Outlive your account and what do you do? Sen. Stedman says there are solutions - buy an annuity, for example. But the devil may be right at home in these details - how much would an annuity cost, and to what extent are we asking the retiree to gamble?

Sen. Stedman is right when he says we need to come to grips with this problem and not let it compound for future Alaskans. The state has worked out changes before, leaving public employees and teachers in different tiers of retirement systems, sometimes driving them to tears. But the reality is that rising health costs and longer lives mean that gold-plated retirement plans are history; Tier 1 benefits are not coming back.

Alaska can, however, afford a year's time to make sure that everyone involved understands what we're doing and why, understands both intended results and potential unintended consequences. There's predictable disagreement about the impact of the change and the actuarial assumptions behind it. Given the stakes, the risk of moving quickly is worse than the harm in some delay.

According to Melanie Millhorn, director of the state Division of Retirement and Benefits, there are more than 90,000 active and retired people participating in public employee or teachers retirement systems; more than 50,000 members and dependents are receiving medical benefits.

An estimated $5.7 billion and growing liability - which the bill does not address, except to give the problem to a new retirement management board - will have a long-range effect on what Alaska will be able to do for its schools, public safety and other services in the future.

Let's take some time over the interim to make sure we know what we're doing, and make sure this change in the contract between the state and its workers works for everybody. Let's address the doubts, and finish the job next session.

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