Tier IV: Let’s Take a Deep Breath
3 May 2006I am pleased to present in full this excellent article written by Senator Kim Elton. It was originally published in the April 28 addition of Senator Elton’s newsletter, Off the Record. In this article Senator Elton brings us up to date on some of the critical issues that have come to light since the passage last year of Senate Bill 141 which destroys Alaska’s public employees pension system, and seriously undermines future efforts to recruit qualified teachers, police, and other critical public employees in public service to the people of Alaska. The needless and mean-spirited destruction of this important pension system will come into effect July 1 of this year unless current versions of House Bill 475 or Senate Bill 293 are passed.
House Bill 475 contains an amendment that will delay implementation of Senate Bill 141 for one year. Senate Bill 293 contains a provision that will delay the implementation of Senate Bill 141 for two years. Senate Bill 141 is too flawed to pass without a better understanding of what the consequences will be of this bill. In addition, important new information is coming to light which increasingly indicates that the often heard assertion of “the unfunded liability crisis” is nothing more than a huge hoax. Read more about this in future ACPP blog postings. ldw
Tier IV: Let’s Take a Deep Breath
“A young couple struggles to repair a hopelessly dilapidated house they just purchased.” That’s the web site plot synopsis for my least favorite Tom Hanks movie–The Money Pit.
‘Grizzled Alaska legislators struggle to repair a hopelessly dilapidated defined contribution retirement system they just built.’ That’s the plot line for a potential sequel–The Money Pit: A Retirement Fixer-Upper.
Last session we pledged to move into a hybrid defined contribution tier IV retirement system on July 1 of this year. The legislature committed to buying this new tier IV retirement home and preparing it for all public employees hired after July 1, 2006. It took 15 days in the special session and a confusing three conference committees before the House acceded to Senate demands to buy this different retirement home with its experimental architecture and untested construction techniques.
The rationale for committing to the new tier IV place was that the mortgages we already hold on the old retirement homes, the tier I, II and III places, were too high and payments on the new place would be less. Well, surprise. The mortgage debt on the old places are high and climbing and the new tier’s payments aren’t any lower than on the most recent tier III retirement home.
On the mortgage side, our pension debt isn’t going down and may grow even larger because there will be fewer employees paying on the old houses–the tier I, II and III places. That’s because new employees won’t be moving into the tier III place and helping with the old mortgage. On the payment side, employees coming into the newly constructed tier IV retirement home will pay more for their new retirement home and, oftentimes, so will their employers. Yes, you read that right: higher costs for lower benefits.
Not only are there no significant advantages with the tier IV retirement home, the more we look at the tier IV structure the more we find the plumbing is shot, the electrical is sparking and the foundation needs massive repair. HB 475, this year’s bill to fix the problems, is growing at an alarming pace.
HB 475 started out as a two-page list of “honey-do” projects. The bill is now 34 pages.
Here’s just a few of the fix-it things we’ve found so far in the tier IV retirement ‘home’ we haven’t yet occupied:
- no COLA for survivor’s pensions
- the requirement that new employees qualify for both PERS and TRS before being able to access a Health Retirement Account;
- no funding source for the occupational death and disability benefits;
- there’s double-dipping potential in disability language;
- no way for employers to terminate participation in the defined contribution plan;
a nonfunctional appeal process; and- we’re not sure the new retirement plan is IRS compliant.
HB 475 has grown to nearly 100 sections with nearly as many must-do fixes. In fact the longer this bill lingers, the longer it gets as new problems arise.
Out of all the problems we’ve found so far, the biggest is the issue of IRS compliancy. The IRS reviews any retirement structure that removes dollars pre-tax. No scamming. The review is not perfunctory and it takes a long, long time. The IRS corps of green eyeshade accountants and nit-picky lawyers studies retirement plan details even more closely than parents review their student’s report card.
And the IRS punishes lackluster performances by making someone pay taxes on dollars that go into a flawed retirement plan. And then they can add penalties. If, like most taxpayers, you define peril as an IRS audit, then there’s plenty of peril in going ahead with a brand new retirement plan while you’re still finding structural issues.
The peril and the numerous other problems compelled Alaska House members to attach to HB 475 an amendment that delays the date we move into the tier IV retirement home from July 1 this year to July 1, 2007. It’s a pretty good idea. (Full disclosure on my opinion this is a “pretty good” idea: I’m sponsor of SB 293, a bill that just moved from Senate State Affairs, that delays the move to tier IV for two years. That’s an even better idea.)
But some in the Senate majority say any delay is terrible, just terrible. Check the comments on the web site for Alaska Republican legislators. There you find this quote from the chief architect of the shabby tier IV retirement home: “Tuesday’s action by the House (to delay the move by one year) is fiscally irresponsible and totally unnecessary. The same parties tried unsuccessfully to stop pension reform last year and are back at it again.”
Harsh words from one Senate Republican about a House Republican who sponsored the one-year delay amendment on the floor. The amendment sponsor is pretty savvy–he’s a CPA familiar with pensions and taxes. Ten members of the Republican majority supported the amendment.
Amusing as some may find the sight of one member of a political party trashing other members of the same political party, good policymakers get nervous when it happens. I actually hope Republicans stop this internecine sniping over the tier IV retirement home they’ve built. It becomes destructive when one legislator augers in with divisive, over-the-top language because Alaskans expect smart government more than a smart mouth.
Smart government, in this instance, means tarry a bit before you finally sign a new mortgage for a new retirement structure. We have long lists of problems and the fixes need to be done right, not done fast. We also know that the more we look, the more problems we find. And we know the IRS must bless this fixer-upper or we face potential, and incalculable, financial liabilities if we move into tier IV before we get a certificate of occupancy.
And there isn’t a smart mouth around that can gloss over these issues.