We Must Reform State Pensions To Save Them

By Larry Stutts

I hope you and your family had a wonderful Thanksgiving! Maybe you are looking for a “fun” topic to discuss with your family over the Christmas holidays, so let me fill you in on state employee pensions. The State of Alabama must make smart reforms to public employee pensions to both save taxpayer dollars and keep the retirement systems solvent for future generations.

There are three separate retirement systems for state employees: a Judicial Retirement Fund (JRF), a Teacher Retirement System (TRS), and an Employee Retirement System (ERS). As of 2013, over 400,000 current or former employees are in these three retirement plans, all of which are managed by the Retirement Systems of Alabama (RSA), and have total assets of close to $29 billion.

Unfortunately, the RSA programs have liabilities totaling over $44 billion, meaning that RSA has an unfunded liability of around $15 billion. To put that number in perspective, every family in Alabama would need to contribute $8,274 to close the $15 billion liability gap, as the Alabama Policy Institute pointed out in a thorough study of Alabama’s pension systems.* The difference between $44 billion in liabilities and $29 billion in assets means that Alabama’s retirement systems are funded at 66 percent, which is below the national average of 72 percent for state pension plans.

Further, the RSA system is up to 66 percent funding only because the state legislature annually appropriates a huge amount of money to keep the system afloat. This past year, the legislature appropriated over $900 million to RSA. For a variety of reasons, RSA’s investment returns aren’t strong enough to fund the system, and taxpayers, in a time of pressing financial difficulty, are on the hook for nearly $1 billion to RSA annually. Those are dollars that cannot go to classrooms, Medicaid, or DHR.

I want to make sure we have a fully funded pension system for our future teachers and state employees. The temptation is to kick the can down the road, to give the hard decisions to someone else. But we have a moral obligation to act now. Smart, measured reforms to the retirement plans for new state employees will ensure a healthy retirement system is there when our children and grandchildren assume teaching positions or serve as state troopers.

Let me be clear: I do not favor changing the retirement plans of any current teachers and state employees. It is not fair to change the rules of the game for people already vested in the system. However, I emphatically believe we must make reforms to the retirement plans for new employees.

Most private sector employees now have 401(k) plans to fund retirement. But nearly all of RSA’s retirement plans are defined benefit, which means state employees have a generous retirement package guaranteed to them, no matter how RSA’s investments perform. So even if RSA’s investments on behalf of state employees fall below its guaranteed 8 percent return, RSA (and by extension, the taxpayers through the legislature) are on the hook for much of the difference. Unfortunately, from 2003-2013, RSA’s investment returns were below 8 percent and essentially zero for fiscal year 2015.

State retirement plans must be reformed for future state employees. The Legislature cannot afford to keep putting nearly $1 billion per year (and growing) into RSA, when our schools, roads, and state parks need every dollar we can spare. I am privileged to serve on a bipartisan legislative task force that is studying pension reforms around the country. Some states waited too long to make reforms and are now under tremendous financial strain. In Alabama, we have time to make tweaks to the pension benefits for future employees, but we must act now to keep state retirement plans affordable and solvent for decades to come.

Dr. Larry Stutts represents Senate District 6, comprised of all or parts of Marion, Lawrence, Lauderdale, Colbert, and Franklin counties, in the Alabama Senate. He can be reached at [email protected] or 334-242-7862.

*This article has been updated to give attribution to the Alabama Policy Institute for calculating the per household share of the state’s unfunded pension liability.