In January, the Retirement Systems of Alabama (RSA) released its Comprehensive Annual Financial Reform (CAFR) for the 2013 fiscal year. The report was received with little fanfare. During an election year, no politician wants to run afoul of the RSA and the billions it invests in Alabama.
Unfortunately, this head-in-the-sand approach to public pension accountability is not working, and it will have painful consequences for Alabama's future. While state politicians have made needed adjustments to the state retirement system over the last several years, they have left the defined benefit structure of the RSA intact.
According to the Bureau of Labor Statistics, only 68 percent of U.S. workers have any access to retirement benefits and only 28 percent have access to a defined benefit pension plan like those provided through the RSA.
Traditional defined benefit plans are on the way out. Employers and governments, especially in the case of public pensions, are realizing the unsustainable burden of guaranteeing these pensions regardless of market conditions or investment performance.
Warning signs are easily visible in the RSA's most recent CAFR. First, Alabama's Teachers' Retirement System, Employees' Retirement System and Judicial Retirement Fund are 66.5, 65.7, and 61.6 percent funded, respectively. These are the current percentages of the amount necessary for the RSA to pay retirement obligations to current and future retirees.
The trajectory of the pension plans is not particularly rosy either. RSA's investment income was almost nine percent less ($395 million) in fiscal year 2013 than it was the prior year. Even as markets recover from the recent recession, RSA's unfunded pension liabilities increased from 2011 to 2012 in the state's two largest retirement plans. More importantly, the State of Alabama paid an annual required contribution just shy of $1 billion for fiscal year 2013, a return to increasing state payments after a sharp decrease in 2012.
Before anyone cries foul for asking state employees and retirees to shoulder the burden of pension reform, the discussion should start with one caveat: Promises made to current state employees and retirees must be kept.
Alabama's leaders have hopefully learned from the painful example of Prichard, where the city's pension fund ran dry and retirees stopped receiving checks they expected. The problem is that Alabama needs a modern employee retirement system that avoids making grand political promises it may struggle to keep in the future.
The good news for Alabama is that plenty of states have provided examples of solid alternatives. A number of states have turned to cash balance plans or hybrid plans that combine elements of individual retirement accounts and defined benefit plans.
As of September of 2013, the National Association of State Retirement Administrators reported that 16 states administered these types of plans as either a mandatory or optional primary retirement benefit for some or all of their state employees. Importantly, these states run the political gamut from conservative Georgia and Texas to more liberal Oregon, Rhode Island and Washington.
These changes may well mean a different retirement landscape for future state employees, but these are exactly the same realities faced by the average employee in Alabama required to guarantee the state's current public retirement system with their tax dollars.
Public pension issues are challenging to handle, but they are more effectively addressed by choice than by fiscal requirement. If Alabama's political leaders exercise political courage in the short term, the state could avoid significant pain in the future.