State Sen. Jesse Kiehl, D-Juneau, right, asks Ajay Desai, director of the Alaska Division of Retirement and Benefits, about the assumptions used to calculate pensions earned by state employees under a fixed-amount plan in effect until 2006 and a subsequent 401K-type plan during a Senate Finance Committee hearing Thursday at the Alaska State Capitol. (Mark Sabbatini / Juneau Empire)

Report has some lawmakers ready to shed tiers

401k-style state pensions perform worse than expected in first in-depth study of 17-year-old system

A state employee hired in 2005 would get a pension equal to about 30% of their salary after 15 years, while an employee hired in 2006 would get an average of about 18%. Also, the latter employee’s pension depends largely on how well he or she invests, whereas the state bears the risks during up-and-down market cycles for the person hired a year earlier.

That’s one simple glimpse in what is purportedly the first comparison of pensions for state employees under the old vs. new systems, presented Thursday to the state Senate Finance Committee. The analysis shows the new pension systems — while expected to pay out less than the old ones, in order to reduce the cost to the state — are performing worse than projected since they took effect in 2006, either somewhat or drastically in the opinion of various legislators and other policy officials.

“I knew the defined contribution was worse,”said Sen. Jesse Kiehl, a Juneau Democrat on the committee, in reference to the current pension system. “I didn’t know it was such a pig.”

The analysis was presented as numerous legislators are stating pension reform is a priority this session, due in part to years of an outmigration of people from Alaska, and a current workforce shortage many public and private employers describe as critical. A few bills have been introduced — two seeking changes to police/firefighter benefits and one by Kiehl (Senate Bill 11) that applies to all employees.

The above-mentioned hypothetical 15-year employee expected to get 30% of their salary under the old system was expected to get about 21.4% under the new one, but in reality the average for 207 employees in that category was about 3.4% less. Of those, 20 employees — or fewer than 10% — managed to do better than expected in terms of earnings with their investment accounts, but the 23.5% average pension for those employees was still below the old system.

Sen. Bert Stedman, a Sitka Republican who co-chairs the finance committee and was in the Legislature when the pension system was changed in 2006, said after the hearing the timing is right for a thorough performance assessment. But he said there’s still too many unknowns to determine what further changes if any to the pension system should be pursued.

For instance, while the numbers in the presentation suggested disappointing results, Stedman said the figures would have looked better a year ago when the markets were in a stronger position.

“I would say they’re slightly a bit light,” Stedman said, comparing the actual results with the projections. “You have to remember we’re measuring it after a huge down year in the market.

He added: “Some of the comments I heard is it’s a complete failure, the new tiers. That’s just not true.”

The revised pension systems were implemented because the state was faced with a massive “debt liability” in pensions that would eventually need to be paid out, without sufficient funds to do so. The result was the existing “defined benefits” plan — provided to 94% of state and local government employees nationally — was replaced with a 401k-style “defined contribution” where benefit amounts aren’t guaranteed.

The old Public Employees Retirement System, commonly known as Tier III, requires the state to provide whatever funds are necessary to ensure full pension payments. Under the current system known as Tier IV the state contributes 5% and an employee 8% of an annual salary into an individual pension fund that is invested, with the pension payouts largely dependent on the investment returns.

A somewhat different system applies to the Teachers’ Retirement System, where the current pensions known as Tier III are also “defined contribution,” but with the state contributing 7%.

The presentation by Ajay Desai, director of the Alaska Division of Retirement and Benefits, made a number of assumptions in calculating pensions for various types of state employees in various tiers. But a common assumption for employees in the newer tiers was pension accounts would earn 7% annually in investments, which Kiehl and some other critics called unrealistic.

“As far as I’m aware the Permanent Fund gets a 7% return,” said Heidi Drygas, executive director of the 8,000-member Alaska State Employees Association,, “The average Joe or Jane investor is not going to get a 7% return.”

Furthermore, she said, the newer tiers put the burden on employees rather than the state if investments perform poorly.

Research indicates an individual earns about 1% less than professional entities, Kiehl said, which “every year compounded over a career” becomes an enormous amount.

Drygas also criticized other aspects of the analysis, stating the presumed salaries for both entry and long-time employees are far higher than reality. The listed starting salary of $80,000 for firefighters, for instance, is closer to an average of $65,000.

“There’s not a single teacher making $130,000 across the state,” she added, referring to charts in the presentation showing a teacher with that salary after 30 years.

In addition to examining the actual earnings employees in the current pension system have earned, Desai calculated what the new pension accounts would be if the state’s contribution was increased 1% and 2% (i.e. 6% and 7% under PERS). Either increase shows employees getting higher pensions than original projections under the new system — and an employee retiring after 30 years would actually get a higher pension than under the old system, if they managed to earn at least 7% n investments.

But hesitation to outright opposition was expressed by legislators and officials interviewed after Thursday’s hearing.

Stedman said one of the reasons more precise data is needed about the actual pensions employees are receiving under the different systems is so the effects of any further changes can be accurately assessed. For instance, it isn’t known yet how much it would cost the state to contribute an additional 1% to the retirement accounts of employees.

“Rather than get the conversation steered into will this will cost the state too much money, it’s whether Tier IV is comparable to Tier III,” he said. “Cost comes later.”

Also, Stedman said other possible solutions deserve consideration such as an escalator clause where the contribution increases depending on length of employment.

Drygas said an increased contribution by the state doesn’t resolve the bigger problem of employees bearing the burden of poor investment markets.

“It still leaves the risk with the employees and it assumes everything is going to go perfectly according to plan,” she said.

Increasing the state’s contribution 1% is obviously a possible solution, but others also deserve consideration such as an escalator clause where the contribution increases depending on length of employment, Stedman said.

Kiehl said increasing the state’s contribution by 1% or 2% isn’t a practical solution because the uncertainty that has resulted in the large-scale departure of state employees would remain, “so you just keep throwing cash into a pig.”

“I think we just saw Tier IV is beyond tweaking,” he said.

• Contact Mark Sabbatini at mark.sabbatini@juneauempire.com

Mark Sabbatini / Juneau Empire 
Sen. Bert Stedman, R-Sitka, center, explains the reasons for seeking an assessment of the state employee pension system during a Senate Finance Committee hearing Thursday at the Alaska State Capitol.

Mark Sabbatini / Juneau Empire Sen. Bert Stedman, R-Sitka, center, explains the reasons for seeking an assessment of the state employee pension system during a Senate Finance Committee hearing Thursday at the Alaska State Capitol.

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