Tier system: Good or bad?

PERS-TRS boards avoid making any recommendations

Posted: Monday, November 29, 2004

Editor's note: This is the second of a two-part story about the state's Public Employees Retirement System and the Teacher Retirement System, and the financial difficulties the state and Kenai Peninsula Borough are facing in funding them.

Creating new tiers in the state's public employee and teacher retirement systems, as has been proposed, would be bad public policy that could end up forcing some Alaskans onto welfare programs in their retirement years, NEA-Alaska President Bill Bjork warned this week.

Votes by the Public Employees Retirement System Board and the Teacher Retirement System Board at their meeting last week resulted in no recommendations to the Legislature for or against new tiers in those programs. The PERS board got close, but voted 2-2 on whether to recommend a Tier 4 alternative proposed by the state actuary, Mercer Human Resource Consulting.

Meanwhile, the TRS board voted to make no recommendation for what would be a Tier 3 within that system.

Possible new tiers remain on the table, however, because the Legislature is free to consider them if it chooses, even absent board recommendations.

"We were encouraged by the TRS board vote to take no position. That is a positive move," Bjork said last Monday. "At the same time, we are disappointed by the PERS board vote. Both (new tier proposals) are bad public policy for a variety or reasons."

NEA-Alaska represents about 13,000 schoolteachers (TRS members) and education support personnel (PERS members) in the state. The union opposes adding new tiers to the systems, claiming they would shift costs from employers to employees.

According to Bjork, Social Security provisions known as the Government Pension Offset and the Windfall Elimination Provision, which apply in Alaska, have the effect of reducing Social Security payments to retirees who also draw pensions from PERS and TRS.

Mercer's Tier 4 proposal could prove disastrous for some retirees when combined with the affect of the Social Security reduction, Bjork said. It could become too costly for some retirees to get healthcare until they were old enough for federal Medicare to kick in, he predicted.

"The new tier could lead many retired employees to need welfare in their elderly years at a time when they ought to have some sense of security," he said.

Dave Fremming, special assistant to the commissioner of the Department of Administration, took issue with NEA's claims, saying a bulletin regarding the PERS-TRS issue posted on the union's Web site "had a lot of misinformation."

Fremming said the state's look at new tiers was based on trying to reach a balance between having benefit and retirement packages that would attract quality employees and keeping rising costs under control.

Nothing in the proposals for new tiers would affect the retirement and benefits promised to current workers and retirees, he said.

However, any reduction in the attractiveness of pay and benefit packages for certified educators would mean a smaller pool of prospective teachers, and that could have immediate impacts in classrooms, Bjork warned.

Three out of every four teachers in Alaska was hired from Outside, he said. Alaska once was able to attract some of the best teachers available. Today, that's changed for a variety of economic factors, but mostly because Alaska's attractiveness has fallen compared to job offerings elsewhere in the nation. Now is no time to cut benefits, he said.

"When we're trying for increased student achievement, a quality staff ought to be a paramount concern," Bjork said.

Bjork pulled no punches when he said Mercer Human Resources Consulting, the state's actuarial firm, gave the state "bad advice" in the late 1990s that led the state to lower the employer contribution rate to PERS.

Fortunately, he said, the TRS board resisted the call to reduce contributions or that program might be even further behind.

"Mercer should have ad-vised the state not to make the reduction," he said, adding that the Legislature pushed for it.

Company spokesperson Stephanie Poe in Mercer's Washington, D.C., office said the company would not comment.

"Mercer policy provides that we may not discuss the specifics of a client relationship, or the services provided there under, with anyone other than the client," Poe said.

Rather than creating still another tier and offering future employees even less incentive to come and teach or work in education in Alaska, the state should focus attention on containing healthcare costs themselves, Bjork said.

NEA-Alaska has its own healthcare insurance program but uses many of the same healthcare providers, he said. The state's costs are increasing 3 percent to 5 percent faster than those seen in the union program, Bjork said.

"It should be illogical that their costs should be so much higher," he said, adding that the real fix lies in instituting managed care to get a handle on costs.

According to an NEA-Alaska Web site bulletin posted just prior to Friday's PERS-TRS board meetings, the new tiers would contribute little or nothing to the current system but would funnel the bulk of new contributions into individual accounts that could be withdrawn when an employee resigns or retires, thus eroding the financial viability of the system as a whole.

The union also said Gov. Frank Murkowski seemed determined to get the state out of the retirement and health insurance field by putting the burden on employees, likening the effort to "the raw deal" promoted by those looking to privatize Social Security.

"Rather than deal with the health insurance issues we all face, the state is saying we'd rather be out of the business," Bjork said. "Until we are in a posture where we aren't importing 75 percent of new teachers, we need to have a competitive system. We need to manage those costs. It is just irresponsible not to do that better."

NEA blamed "short-sighted and faulty management decisions," errant actuarial assumptions and "shockingly inept" efforts at healthcare cost containment for the decrease in funding rates to PERS and TRS.

Asked if the state was eying getting out of the health insurance business as Bjork alleged, Department of Administration Commissioner Ray Matiashowski said, "Heavens no!"

He also said it was difficult to hear criticisms about the yearlong analysis of possible new tiers. There has never been such a thorough effort to solicit input from stakeholders, including employees, he said.

"This was a very constructive approach and a thoughtful analysis a well thought-out program," he said. "It got significant input from employees and employers. There was no preconceived notion going in. We are mandated and committed to the long-term soundness of these funds."

The commissioner also said that as far as a future tier giving employees the ability to take individual accounts with them if they leave, most younger workers these days want just that kind of portability, he said.

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