RSA: State pensions have turned a corner

Hours of presentations at the Retirement Systems of Alabama Monday boiled down to this message from staff: State pensions are in better shape than you think.

But legislators studying shortfalls in the state’s pension system still had questions about unfunded liabilities in the state’s pension systems.

The Legislature’s Joint Committee on Pensions met for nearly four hours at RSA’s Headquarters on South Union Street, getting a detailed explanation of RSA investments, methods and holdings in managing between $33 and $35 billion in funds for state workers. Long-term, the pension systems have an unfunded liability of about $12 billion.

Funding in the Teachers Retirement System stood at 67.5 percent in 2014, according to RSA. The Employees Retirement System funding stood at 66.9 percent that year.

The average pension benefit is small. Education retirees have an average annual benefit of $22,169. State retirees’ average benefit is $21,410.

The state’s pension system was fully funded in late 90s, due to the stock market boom. But RSA staff said liabilities had grown due to the downturns of 2001-02 and 2008-09 and unfunded cost-of-living-adjustments.

But RSA stressed that the improved stock market picture, along with changes to the state pension system, had helped RSA’s bottom line.

“We have, as we hope, turned a corner and we hope to see improvement in the future because of some reforms that have been made,” RSA General Counsel Leura Canary said.

The Joint Committee on Pensions is studying and developing “consensus recommendations concerning the benefits, investments, and funding of the state-administered retirement systems and any other measures that the committee believes would lead to the improved financial stability of the state-administered retirement systems.” The committee must present its proposals by the fifth legislative day of the 2016 Regular Session.

Speakers also stressed the low-cost of RSA's in-house investing model. RSA's investment costs average two basis points, vs. 47 points for public pensions as a whole. State employees pay at or above the national average into the system, reducing costs.

All speakers were careful to praise legislators for the changes they had made to the pension system, and for not missing payments into it. Edward Macdonald, president of Cavanaugh Macdonald, a consulting firm that does work for RSA, said “there is no right number” for a funding ratio for pension plans. A sound system, he said, gets consistent payments and funded benefit increases. Macdonald also said Alabama was in better shape than Illinois or New Jersey, two states that encountered pension difficulties because legislators have missed payments into the funds.

"When you don't make your payments, funds are not sustainable,” he said. “But it’s not because your benefits are too high."

Committee members challenged speakers throughout the presentations. Rep. Phil Williams, R-Huntsville, suggested at one point that Macdonald was emphasizing regular payments to set up the Legislature for blame if the system went downhill. Macdonald said that would only happen if legislators stopped providing full funding for the system.

"We're in an easy position,” he said. “We say 'here is the number.' You have the hard job of funding the number.”

The discussion focused on sustaining benefits, rather than extending them. Legislators sounded doubtful about any cost-of-living raises in the near term.

“I don’t see any way to support COLAs in the next 10 to 15 years,” said Rep. Jim Patterson, R-Meridianville. “It doesn’t look like we’re going to have them any time soon. That is just a fact.”

RSA officials have expressed concerns about legislators turning the current defined-benefit system into something closer to a 401K plan. RSA CEO David Bronner renewed his attacks on the Arnold Foundation, which has funded state pension research throughout the nation; Bronner called the Foundation, along with conservative activists Charles and David Koch, a group of “billionaires trying to wipe out state pensions in the United States of America.”

Canary stressed the legal difficulties of making a change. “Employees have a constitutional right to certain benefits if they are entered into in the state,” she said. “They’re considered contract clause cases.”

Keith Brainard, research director for National Association of State Retirement Administrators, also praised the management of Alabama’s pensions by the Legislature, saying “most states do not have this kind of record.”

“Are Alabama’s pension funds unstable?” he asked. “As far as I can see, they are not.”

Brainard got no argument from Sen. Bobby Singleton, D-Greensboro, a member of the committee.

“I think we’re in good shape,” he said. “Here and there, it might need a little tweaking, but overall I think it’s a good system.”

Patterson said after the meeting he enjoyed the presentation, though he did not commit to any approach.

“We want to go where the facts take us,” he said.