State needs a rainy day account, not a tier to nowhere

Last spring I reported on the state legislatures' ill-thought reduction of retirement benefits for state workers, including teachers. There were lots of questions at the time about the so called trouble that current retirement funds were/are in. It seemed no one had a good answer. The most that I saw that came from the opposition was that the funds had been under funded over the years by state legislators. Here, in this opinion piece from todays Juneau Empire finally we have some anwers from someone who should know:

Dave Stout has been a retirement counselor for the Division of Retirement and Benefits for much of his 27-year state career.

I have followed with both interest and concern the numerous articles and letters regarding the financial woes of Alaska Public Employees' Retirement System (PERS) and the Alaska Teachers' Retirement System (TRS). I have worked for the Division of Retirement and Benefits since 1980, both as a retirement counselor and as one of the managers. The division administers both programs. Over the years I have developed a good understanding of both retirement plans, and through my job have observed how the plans have been managed.

As with so many things we are told today, we're given only part of the story - usually the part that supports the storyteller's position. For instance, we have been told that the retirement plans are in financial trouble because our retirees live too long, that the cost of health care is draining the system, and because of the downturn in the economy. I'm sure that all of these have some truth, but only to a point. There are other contributing factors that have not been as well-publicized - political pressure and short-sightedness of many public officials.

Benefits paid by both plans are funded by employee contributions, employer-matching contributions, and from the earnings off of the investments. The percentage that each individual pays into the plan is set by statute. However, employer-matching contribution rates vary from year to year. So by statute, the amounts that cities, boroughs, the state, and the school districts contribute into the plan are expected to fluctuate from one year to the next. Nothing new, it has been that way since statehood.

Some 20 years ago several things started to happen. First, the amount that public employees contributed into the retirement plan was increased from 4.25 percent of gross earnings to 6.75 percent, plus medical benefits provided after retirement were reduced for newer members. Teachers soon followed in 1990 with individual rates going from 7 percent to 8.65 percent with similar reductions in health-care benefits. Second, at about the same time, pressure was being put on the plan administrator to reduce the amount collected from the participating employers. To be fair, at the time it appeared that there was a growing surplus of funds, at least on paper. Consequently, employer contribution rates were steadily reduced for the next 15 years, eating away at any possibility to hedge against an economic decline. By the time the "retirement crisis" was finally recognized a couple of years ago, some participating PERS employers were paying no matching contributions - none! Others were paying a small percentage of what was charged in the 1980s. Employees were paying more, while their employers were paying less and less.

Establishing a new retirement system (or tier as we like to call it) that offers fewer benefits to teachers and public employees, especially one that isn't any cheaper than the old one, does nothing to "fix" what we already have. Our public officials (appointed and elected) should have used prudence and foresight by anticipating our investments by their very nature would have periods of decline. Instead of chopping the amount of matching money, the more conservative, fair and balanced approach would have been for modest employer cuts while at the same time keeping some of the surplus to guard against the day that the investments lost value.

It's not too late. The U.S. economy seems to be rebounding and in the next few years the retirement funds will likely be adequately funded. Just watch. When the funds again become healthy, the same politicos will once more clamor for rate cuts. Both the employees and employers should make reasonable contributions into the plan, but both the TRS and the PERS need to be better protected. Each should be allowed to accumulate the capital reserves needed to hedge against the day that history repeats itself. A "rainy day" account is nothing new to the state and one is needed here - we need a reserve account, not a new retirement tier to nowhere.

As I have said before, we are a state that imports at least 25% of it's teachers. To attract high quality teachers we need to be, at least, be competitive. We used to have the highest wages and some of the best benefits. We no longer rate anywhere near the top. Why would anyone come to our notoriously terrible climate and isolation, and stay when they could do better anywhere else? This is still a big topic here because last year they passed only a short term fix. Stay tuned here for more on this important matter.
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