Faced with recruiting crisis, Alaska mulls reopening of 2 pension plans

Nearly two decades after the Alaska Legislature closed the state's two defined benefit plans for public employees and teachers, the state is closer than ever to reopening those plans as it faces a recruitment and retention crisis for general employees, teachers and public safety officials.

While the bill has passed the Alaska Senate, expectations are muted regarding its chances in the conservative-controlled House of Representatives due to concerns about costs, although an analysis commissioned from notable economics professor Teresa Ghilarducci shows the state could save $76 million annually by reopening the DB plans.

Unsuccessful legislation to reopen the DB plans, which were closed in 2006, has been introduced multiple times beginning as early as 2009, but this latest bill, SB 88, has been by far the most successful, having passed the Alaska Senate 12-5 on Jan. 31.

As of Jan. 31, the Public Employees' Retirement System's DB plan assets totaled $20.4 billion and DC plan assets totaled $3.5 billion, and the Teachers' Retirement System's DB plan assets totaled $9.7 billion and DC plan assets totaled $1.3 billion.

Republican Sen. Cathy Giessel is co-sponsor of the bipartisan bill, which would provide a new defined benefit plan tier to new employees hired after July 1 and also give employees hired since the closing of the DB plans on July 1, 2006, the choice to remain in the DC plan or join the new DB plan tier. In a Feb. 9 interview, Giessel said that the closing of the DB plans has led to a crisis in recruiting and retaining public employees, and the severity of that crisis has become apparent in the past five or six years.

One of the provisions of the Public Employees' Retirement System and Teachers' Retirement System's DC plans that opened for new hires in 2006 was that their accounts became fully vested after five years, and participants were free to withdraw all employer and employee contributions after leaving their jobs.

"It's actually motivating people to work for (only) five years, and at that point they're vested and they can take the employer and employee (contribution) money and leave," Giessel said. "Data shows that about $9 million a month is being pulled out of those funds by people who are leaving at five years vesting."

Giessel also noted that many are leaving the state to work in the lower 48 where public employees are able to participate in DB plans. The result is a vast shortage of employees, she said.

"We don't have enough heavy equipment operators to clear the snow," Giessel said. "This year, Anchorage has seen a historic record snowfall, and the same has been happening in Juneau and Fairbanks. (People) can't get to work, and they can't get to medical appointments."

"We're seeing desperate efforts to hire J-1 visa teachers because we can't hire enough teachers here," she said. Giessel said one elementary school in her home district in Fairbanks recently had an opening that normally would see between 20 to 50 applicants and only had three.

The crisis in public safety is even more pronounced, she said. Just north of Anchorage, the state's largest municipality, the Matanuska-Susitna Borough does not maintain its own police force. Outside of the cities of Palmer and Wasilla, which are part of the borough but have their own police departments, it is up to the Alaska State Troopers to oversee the area.

Currently, Giessel said only two troopers are responsible for the borough and the safety of a population of over 100,000 people spanning an area equal to the size of West Virginia. Remarkably, on Jan. 16, the borough assembly passed a resolution urging residents to arm themselves because of the lack of law enforcement.

"It just goes on and on, so that it's reached a critical situation, so we believe that a defined benefit retirement system would not only keep people here — we want to keep them — but also help with recruitment," Giessel said.

Chuck Kopp, a retired Alaska police officer and former member of the state House of Representatives, is the co-founder of WinFluence Strategies, which was hired to facilitate the efforts of a broad coalition of public safety and teachers' unions and other organizations to lobby for the bill.

Kopp credited that coalition for bringing the bill as close to passing as it has.

"We did pass the Senate, and we had a couple favorable members that weren't there for the final vote," said Kopp, "but we still got it passed and we still enjoy strong support from that body. Now we're in the House, which is a little more circumspect about the bill, but we're encouraged."

Much of that circumspection has been due to the perceived cost of reopening the DB plans. A study by the state's actuary Buck in May 2023 showed the bill would increase pension and health costs by $1.2 billion for the next 15 years, which has led to objections against the bill by far-right Republicans and organizations like the Koch family-backed Americans for Prosperity. Actuarial consultant Cheiron was called in to analyze Buck's report.

In a Feb. 12 interview, Gene Kalwarski, Cheiron's CEO, said: "We admitted that Buck's calculations were arithmetically correct."

However, he said, Buck's analysis failed to include the economic benefits of reopening the DB plans, and for that he said he recommended the legislature call on an economist to present findings on the economic benefits of reopening the DB plans.

He recommended Ghilarducci, professor of economics at The New School for Social Research and the director of the Schwartz Center for Economic Policy Analysis and The New School's Retirement Equity Lab.

In a presentation to the Senate, Ghilarducci said she found a conservative estimate of cost savings to switching to DB plans would be $76 million per year. One example to support that estimate was a 2017 University of Alaska Institute of Socio-Economic Research report that said the state was losing $20 million annually in recruitment and retention costs for teachers alone.

In a Feb. 6 interview, Ghilarducci said multiple sources of evidence convinced her that the design of the state's retirement plans have had a major effect on turnover.

"I think one of the reasons they reached out to me is that I'm not a conflicted expert," Ghilarducci said. "I'm a professor, and I get paid no matter what. And Buck was really under the gun by their employer to say that it costs something, and they don't have the professional responsibility like an academic does to actually have a cost-benefit analysis. They just don't. They were asked a narrow question, and they gave a narrow answer."

In her report, Ghilarducci said neither the Cheiron nor the Buck reports considered the savings in hiring and training costs, higher risk-adjusted returns on DB plan assets compared to DC plan assets, indirect savings from improved productivity because of reduced turnover as well as indirect economic activity "induced by more reliable public safety, public education, and public services."

Ghilarducci estimated in her report that direct cost savings from reduced hiring and training costs would be $62 million per year, and the savings from earning higher rates of return would be $14 million per year.

The bill was referred to the House State Affairs Committee on Feb. 5. A competing partisan House bill, HB 302, introduced by Republican Rep. Benjamin Carpenter, makes no changes to benefits aside from an increase in employer contributions to the DC plans, was also referred to that committee on Feb. 2.

Democratic Rep. Andy Josephson, who introduced a failed bill two years ago to reopen the DB plan specifically for first responders, said in a Feb. 9 interview that his bill was buried by the committee at the time into a subcommittee that never held any hearings.

He said he found it interesting that that same committee was planning to hold a hearing on his bill on Feb. 13. "I don't know what that hearing is going to be about, except the House Majority is feeling pressure on DB because of Cathy Giessler's bill and they want to find a way forward."

Alaska Gov. Mike Dunleavy has not said whether he would sign any of the bills if passed, and officials in his office could not be immediately reached for comment.