Legislators should reform Alaska's retirement system

What others say

Posted: Thursday, February 24, 2005

Watching legislators discuss the problems in the state-run employee retirement system is enough to put people to sleep, yet the financial mess confronting the system that serves so many Alaska governments and entities should be enough to keep everyone awake.

Quite clearly something must change with how the Public Employees' Retirement System and the Teachers' Retirement System provide for state and local employees. The two programs have an obligation to existing employees that totals $5.6 billion. Of course, that sum isn't to be paid out all at once; rather, the total illustrates the problem confronting the governments that are required to contribute to the systems each year under a set formula.

The sky-high annual contributions are causing increasing pain, which is why the matter has taken on a corresponding urgency in the Legislature. It is also why the public must focus on the problem since, by one estimate, four in 10 Alaskans are somehow connected to the two retirement programs.

How much trouble is the retirement debt causing?

Loads, say officials up and down the state. And they aren't exaggerating. The Fairbanks North Star Borough School District, for example, has included a nearly $4 million increase in mandatory retirement contributions in its just-released budget proposal for the next fiscal year. The city of Fairbanks, the University of Alaska and the state itself are all being squeezed by the retirement systems. The list goes on.

The retirement systems accrued the debt through a combination of factors — overly optimistic expectations of investment returns, soaring health-care costs and a decision to reduce employer contributions. While looking backward should certainly be part of the discussion, looking forward is what Alaska should be doing.

And looking forward will mean making difficult choices, including a fundamental shift in what the retirement systems are expected to deliver for new employees. Those employees should expect a defined contribution to their retirement account, not a defined benefit upon retirement as is now the case. Those are words that the public likely will hear in increasing volume as the weeks progress down in Juneau.

Untangling the knot won't be easy and will take creativity and political dexterity since so many Alaskans are tied to the system.

But there are many Alaskans, those in the private sector, who are not part of the state-run systems or do not have immediate family members enrolled yet who will suffer the consequences of this debt if governments cut services to meet the forced payment. For them, fixing the system — by reducing government payouts over time — might be seen as a matter of fairness.

A December 2004 report from the federal Bureau of Labor Statistics found that in September the private sector spent 85 cents per employee hour on retirement and savings benefits, excluding the mandatory contribution for Social Security. That's 3.6 percent of the average hourly cost of compensation, including pay and all benefits.

State and local governments, by contrast, contributed an average of $2.23 per hour in retirement and savings benefits, for 6.4 percent of total compensation. Most of that was in defined-benefit plans — the type Alaska now has and that spell out what a retiree will receive rather than what an employee will contribute.

A primary reason for the discrepancy between the public and private sectors? Any business executive who runs a deficit year after year or who raises prices — think taxes — too high would soon be out of a job.

Again, solving Alaska's retirement system problem won't be easy, but the deficiencies must be resolved soon.

— Fairbanks Daily News-Miner

Feb. 16

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