State Sen. Cathy Giessel, R-Anch., has introduced legislation that would restore a defined benefits pension for state workers and teachers in an effort to aid recruitment and retention of public-sector workers. The effort is aimed at helping an economy increasingly strained by labor shortages across almost all industries.
Senate Bill 88 would reinstate the state pension system that existed until 2006, when the Legislature switched the system to a defined contribution or 401 (k)-type plan. In that system payments to retirees are determined by financial performance of their retirement portfolios.
Defined benefits, in contrast, is a traditional pension that guarantees payment depending on years of service and salary levels.
Giessel has nine cosponsors to her bill, almost half the 20-member state Senate. It is essentially a proposal by the Senate Majority, which includes Republicans and Democrats. Joining Giessel as cosponsors include fellow Republicans Sen. Gary Stevens, R-Kodiak, the Senate President, and Sen. Click Bishop, R-Fairbanks. Democrats joining as cosponsors include Sens. Jesse -Anchorage, Forrest Dunbar, and Matt Claman.
Kiehl and Rep. Andy Josephson, D-Anch., in the state House previously introduced bills and the expectation is that if SB 88 moves toward passage those proposals will be merged into the new bill.
The new bill is highly likely to pass the Senate but it must still pass the state House, which is under a conservative Republican leadership. Despite that, Democrats and independents number almost half of the 40-member House. If SB 88 passes the Senate and comes to a vote on the House floor the results will be unpredictable. However, the bill must also pass muster with Gov. Mike Dunleavy, who has veto authority and the final say.
State agency managers and school district officials have told legislators this spring that they are losing skilled workers lured away not only by better pay and working conditions in other fields, or states, but also by competing employers being able to offer better retirement plans.
Alaska is the only state that does not offer a defined benefit system as an option to defined contribution plans.
A key problem with the defined contribution system is that, unlike tradition pensions, after employees are vested they can take their retirement savings along with the state’s contribution and leave for another job, transfering their funds into another retirement account elsewhere.
While some employees like the mobility of the defined contribution retirement account, with its option to pack up and leave after a few years, the loss of experienced employees, particularly among peace officers and firefighters, imposes large costs on public employers to train new hires.
“As we see with every industry in Alaska, the state is having trouble recruiting and retaining experienced workers,” Giessel said. “We are at a point where we cannot provide basic government services to the most vulnerable Alaskans, as well as our business community. We need to take steps to become competitive in the labor market, and this legislation could be a major step forward to solve many of the workforce shortages the state is facing.”
When the state transitioned to a defined contribution plan in 2006, it was believed that retirees would earn the same level of retirement as the prior defined benefits system.
However, a new analysis by the state Division of Retirement and Benefits concluded that if a state worker who has spent 20 years under the defined contribution plan were to retire today, the employee would only receive 32 percent of their average earnings, compared to 40.3 percent under the prior defined benefits system – a difference of $8,000 a year. Even more so, a peace officer or firefighter would receive $16,000 less under the defined contribution plan after 20 years of service.
“If you’re going to recruit and retain good workers, we need to bring back defined benefits. Better pay and benefits will help attract good working people to Alaska and keep them here, especially at a time when labor shortages are hammering every sector and job class in the state,” said Sen. Click Bishop, R-Fairbanks, a former state labor commissioner.
“We need more nurses, police, firefighters, teachers, snow-plow drivers, heavy-equipment operators, ferry workers, and more. Offering them defined benefits will give them the incentive to come and stay here,” Bishop said.
Many components of the proposed new retirement Tier V for public employees and are similar to the public employees’ Tier III and Tier II for teachers, which are defined benefit plans. Public employees and teachers who were vested in those plans in 2006 were able to stay with them. After 2006 new employees were required to join the defined contribution plan, or Tier IV.
Under the proposed SB 88 public employees and teachers under defined contribution would have the option to switching to the new system. The new plan would require employees to increase their retirement contributions, however, in an effort to reduce the financial risks for the state. Retirement medical coverage would also remain similar to that in the current system.
“Becoming more competitive in the workforce will help bring stability to our economy and families back to Alaska, and to do that, we need to get this policy right,” said Senate President Stevens.
“Our current system shows we are not competitive, and it’s bleeding into the private sector because of the alarming amount of public employee vacancies which is leading to the absence of basic state services and functions,” Stevens said.