Unions not yet finished with pension fight

Retirement plan as written isn't likely to meet Internal Revenue Service's tax-exempt status

Posted: Friday, May 19, 2006

State officials expect to put in place a new retirement plan for government workers and public school teachers hired after July 1, even though the plan as written is not likely to qualify for tax-exempt status under Internal Revenue Service rules.

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Labor unions say they are weighing a legal challenge.

The Alaska Legislature adjourned its regular session last week without approving a 34-page bill that would clean up technical problems with the controversial retirement overhaul that was approved by lawmakers in 2005.

The proposed changes were largely designed to ensure that the new plan complied with IRS codes and regulations. Many addressed a provision added late in the session to create a defined-benefit plan for death and disability benefits. The hastily added benefit plan was never fully incorporated into last year's legislation.

The proposed changes themselves were not in contention this session. The dispute arose when the House tacked onto the fix-it bill a one-year delay in implementing the new retirement plan. Proponents of the delay said they wanted to make sure the plan met IRS approval before it goes into effect.

The Senate stripped the delay provision from the bill, however, and it died when the House failed to concur in the waning hours of the session.

State Division of Retirement and Benefits Director Melanie Millhorn said the plan will go into effect this summer, ushering in a 401(k)-type defined-contribution plan for new employees in place of the state's defined benefits pension plan.

She said the IRS would allow the necessary changes to be made retroactively.

"We are just going to have to explain to the IRS, 'Here's how we are going to administer this plan,'" she said. "We will be back before the Legislature asking for some of these very same changes next session."

Labor unions, which vociferously opposed the new system and lobbied hard for the one-year delay, said they are not done fighting.

Jim Duncan, business manager for the Alaska State Employees Association, said putting the plan in place as-is would be irresponsible.

"We don't like a defined-contributions plan. We think it's a real step backward in this state as far as retirement systems go," he said. "But, if it is to exist, it at least should work."

Duncan said the unions are exploring whether to file an injunction to halt the July 1 implementation.

National Education Association-Alaska President Bill Bjork said employees could be forced to pay taxes on their own and the employer's contributions if the plan does not gain tax-exempt status.

"This diminishes an already miserable retirement system," he said.

But Millhorn said the state has worked closely with tax attorneys and they are confident the plan will meet IRS approval. She said the tax-exempt status can be applied retroactively as long as the IRS approves the plan by January 2008.

She admits the state will face extra costs and headaches trying to implement the plan without the proposed fixes and it could face litigation over the interpretation of some sections that would have been made clear by the cleanup bill.

Still she argues the state will be better off by not allowing more employees in under the old plan. State consultants say new employees hired under the old plan would cost government employers about a third more than under the new plan.

Gov. Frank Murkowski championed the switch to a defined-contribution plan as a way to "stop the bleeding" in the pension fund, though opponents said the switch would exacerbate the problem instead by shrinking payroll contributions to the old plan.

Opponents also argue recruitment for teachers, police, firefighters and other public-employee positions will suffer because people will find the new plan less appealing.

The battle over retirement systems is not unique to Alaska. States across the country are struggling to deal with huge shortfalls in assets available to pay retirement benefits.

The National Association of State Retirement Administrators estimates the unfunded liabilities total more than $322 billion.

Alaska's is estimated at $6.9 billion and growing, according to state consultants who blame rising medical costs, poor investment returns and employees retiring earlier and living longer.

Rep. Paul Seaton, who shepherded the cleanup bill through the Legislature, said he hopes lawmakers will put their differences behind them next year and concentrate on making the new plan work once it is implemented.

The Homer Republican said lawmakers could pass the necessary fixes in January.

"Since we will have a plan in place that we are making changes to, we will be in a different situation," he said.

He may be optimistic.

Barring a court order this summer, ASEA's Jim Duncan said the next step would be to push a new Legislature to repeal the plan next session. The unions plan to raise the issue in the upcoming campaign season, he said.

"So even if folks go into a defined-contributions plan, it doesn't mean that six or seven months later, we couldn't reverse that and give them an option," he said.

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