Alaska Shouldn’t Undo 16 Years and Counting of Fiscal Responsibility

COMMENTARY Budget and Spending

Alaska Shouldn’t Undo 16 Years and Counting of Fiscal Responsibility

May 19th, 2022 4 min read
COMMENTARY BY
Rachel Greszler

Senior Research Fellow, Grover M. Hermann Center

Rachel researches and analyzes taxes, Social Security, disability insurance, and pensions to promote economic growth.
Alaska is hardly alone in its struggles amid a demoralized American police force. Hill Street Studios / Getty Images

Key Takeaways

Alaska is the only state that’s accomplished a fully defined contribution plan for all new hires. Now, it is set to pass a bill that would undo it all.

That plan is projected to only be able to pay between one-third and two-thirds of promised benefits.

To address recruitment and retention problems, policymakers should provide public safety workers with actual benefits today instead of unreliable promises.

Sixteen years ago, Alaska enacted a commonsense, fiscally responsible pension reform bill that put new hires into a defined contribution pension plan as opposed to the state’s woefully underfunded Illinois-style defined benefit pension system.

That’s been a win for workers who now have greater certainty about the value of their retirement accounts and accumulated real wealth. It’s been a win for taxpayers by assuring they will not be on the hook for unfunded pension promises that almost certainly would have been made to those workers. And it’s arguably a win for politicians who no longer have growing and uncertain pension costs crowding out other desired spending.

This change was not easy, and Alaska is the only state that’s accomplished a fully defined contribution plan for all new hires.    

Now, Alaska’s Legislature is set to pass a bill that would undo it all. The Alaska House of Representatives passed HB 55, which would bring back a pension plan for the state’s public safety police and firefighters. The Senate is reportedly poised to pass the bill and Alaska Gov. Mike Dunleavy’s final signature is still in question.  

A major impetus for the bill has been the state’s struggles with recruitment and retention for law enforcement. But Alaska is hardly alone in its struggles amid a demoralized American police force stemming from the riots and destruction that followed George Floyd’s death in March 2020.

According to a report from the Police Executive Research Forum, police resignations increased by 18% and retirements surged 45% between April 2020 and April 2021, relative to the prior year.

The fact that nearly every police force outside of Alaska has a defined benefit pension and is struggling as much or more to attract and retain police officers suggests that adding a defined benefit pension won’t move the needle.

That’s especially true if potential police officers and firefighters consider the sorry state of public pensions across the nation. Owing to perverse political incentives to make promises decades into the future when politicians making the promises will no longer be in office, as well as financial mismanagement, state and local pensions are on track to fund, at best, 80 cents on the dollar (based on their own arguably unrealistic assumptions), and more realistically, less than 50 cents on the dollar in promised benefits.

Police and firefighters in Alaska who started work in 2006 or later and have accumulated personal retirement accounts that they own are likely in far better shape than those who belong to the state’s legacy pension system. That plan is projected to only be able to pay between one-third and two-thirds of promised benefits.

Based on the expectation of consistent, relatively high investment returns as predicted by the state, Alaska’s legacy defined benefit pension plan is about 67% funded, but based on a riskless rate of return that is more appropriate for guaranteed pension benefits, the plan is only 33% funded.

Across the U.S. state and local pensions have accumulated an estimated $5.8 trillion in unfunded pension liabilities that mean either taxpayers will be on the hook for new costs, public sector retirees like teachers, firefighters, and police will receive only pennies on the dollar in promised benefits, or both taxpayers and public sector workers will be on the hook for past and current politicians’ broken promises.

While Alaska lawmakers have proposed some safeguards for the new firefighter and police pension system, those safeguards are far from adequate and would put taxpayers at significant risk for higher and rising costs.   

For example, the proposed plan assumes a 7.38% investment return rate even though Alaska Retirement Management Board advisers project a 6.6% rate. The Reason Foundation’s Pension Integrity Project estimated that under market stress (including two recessions over the next 30 years and a more realistic 6% average returns in other years), taxpayers’ true cost would rise from about 11% to 17% of employees’ payroll. In comparison, private sector employers typically provide between 3% and 5% of pay toward workers’ retirement accounts.

In its analysis of Alaska’s bill, the Reason Foundation explains, “The national trend since the Great Recession of 2007-2009 has been for states to adopt greater risk controls in their traditional public pension systems and move towards a variety of plan design options with the goal of avoiding re-exposing state and local budgets to the risks of worsening unfunded pension liabilities over the long-term.”

Alaska’s bill not only goes in the opposite direction by establishing a new defined benefit pension plan; it essentially makes that new pension system retroactive back to 2006 for workers who want to exchange their existing defined contribution accounts for credits in the new defined benefit plan. 

That would increase the risks and magnitude of underfunding going forward. Suppose workers choose to transfer $100 million worth of defined contribution retirement wealth into the new state-run defined benefit plan. The plan—and probably taxpayers, eventually—become responsible for ensuring 7.38% annual returns on that money. So, if those investments lose 16% in the first year (the S&P 500 is down about 16% year-to-date), what’s been characterized as a zero-sum exchange would actually cost $23.38 million in new unfunded liabilities in just one year (the 23.38% difference between an essentially guaranteed 7.38% gain and an actual 16% loss).

Maintaining a fully staffed, well-functioning public safety system is a primary role of state governments. To address recruitment and retention problems, policymakers should provide public safety workers with actual benefits today instead of unreliable promises of future benefits.

Especially as Alaska is a unique environment, the ability to receive higher pay would likely be of greater value in attracting public safety officers to the state than the promise of a comfortable pension benefit if they commit to decades of service.

It’s a terrible time for lawmakers to undo fiscal responsibility. With decades-high inflation and the recent explosion in federal debt adding to the U.S.’ already unsustainable fiscal outlook, Alaska lawmakers shouldn’t burden current and future generations with even more debt.  

This piece originally appeared in The Daily Signal