Voices of the State: PERS-TRS reform: How will it work?

Posted: Sunday, July 31, 2005

Gov. Frank H. Murkowski has signed landmark legislation reforming the Public Employees' Retirement System and the Teachers' Retirement System. The legislation repairs a retirement system that was underfunded by $4 billion in 2002, a shortfall that has grown to about $5.7 billion today.

Now Alaskans are asking how PERS and TRS reform will work. The answers are important and should be free of political rhetoric.

What will retirement reform mean to the Alaska public?

Reform protects taxpayers by containing costs. It insures that future retirement obligations don't spiral out of control. It creates a new Alaska Retirement Management Board. It charges the board with analyzing the unfunded liability and providing policymakers with recommendations to address the unfunded liability.

At the same time we will not ignore an obligation that will affect Alaska taxpayers well into the future: The cost of guaranteeing existing pension obligations for existing PERS and TRS members that will compete for future state dollars.

What does retirement reform mean for current public employees and employers?

Retirement reform does not disturb the existing retirement benefits of current and retired state employees. The benefits conferred on existing members are constitutionally protected. No ifs, ands or buts.

More than a year ago, employers and unions representing PERS and TRS members were invited to join a discussion and survey about new tiers. The survey confirmed that employers were no longer willing to bear the entire financial risk associated with the existing defined benefit plan. They needed predictable, stable contribution rates to balance recruitment and retention needs with budgetary constraints.

While there was only one out of 12 unions contacted that responded to the survey about new tiers, there were 125 employers that responded.

An overwhelming majority of employers stated they needed predictability and stability of contributions, which is exclusively found in a defined contribution plan, not a defined benefit plan.

Employers recognized two realities: First, the defined benefit was no longer sustainable or affordable; second, changing employee benefit tiers would not relieve them of their employer contribution responsibilities. However, it would stop the hemorrhaging of red ink.

Employers didn't hide from the reality that the defined benefit retirement system was no longer sustainable or affordable.

Can current employees switch to a defined contribution?

Yes. The defined contribution plan goes into effect on July 1, 2006. A public employee can switch to a defined contribution if he or she is not yet vested in a defined benefit and the employer agrees with the conversion option. The consent of employers is required because they need to match employees' contribution amounts.

The Division of Retirement and Benefits can assist employers and employees who switch to a defined contribution to calculate appropriate contribution levels. And everything we do to assist members past, present and future addresses our responsibility to assure solvency of the retirement systems.

New public employees and teachers in Alaska will join with employers, many in the private sector, who are enthusiastic participants in a defined contribution program similar to a 401(k) plan. It was designed to be a model retirement vehicle to recruit talented public employees, in the measure signed by Gov. Murkowski.

Today we know that employees will typically change jobs five to seven times during their career and mobility without penalty is a must. A defined contribution plan more effectively meets their changing needs and priorities, including rollover of their plan to a new employer.

Our defined contribution program includes a medical plan, in itself an excellent, additional retention tool. It encourages employees to stay with the state or other public employers by providing a medical plan at the time of normal retirement.

Throughout their careers, every defined contribution public employee — not the state, not a municipality, not a union or school board — will make decisions about his or her financial goals and objectives.

Retirement reform has benefits for all Alaskans.

Melanie Millhorn is the director for the Alaska Department of Administration Division of Retirement and Benefits.

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