So-called Alabama pension crisis is a myth
Published 12:45 am Saturday, April 30, 2016
By Dr. David Bronner
Much ado has been made recently about a public pension crisis in Alabama and the need for reform. The groups and legislators who are clamoring for reform always neglect to mention two critically important facts: the Legislature has already reformed Alabama’s public pensions and there is no pension crisis in Alabama.
First, major pension reforms have already been enacted. In 2011 and 2012, the Alabama Legislature passed pension reform legislation designed to address the very issues that are now being touted as causing a crisis. These reforms were comprehensive and impacted current members (repeal of DROP and increasing employee contributions) and new members (increasing the retirement age and decreasing the benefits). These pension reforms tied with Pennsylvania’s as the most extensive in the nation and significantly reduced the state’s cost of benefits for Alabama’s education and public employees. The RSA is not protecting the status quo by objecting to another major overhaul of the system, but is instead trying to allow the reforms that were so recently enacted to continue to work.
Second, manufacturers of the pension crisis emphasize a large unfunded liability ($15 billion) and increasing employer contributions as evidence of the crisis. Yes, $15 billion is a large number, but it represents pension benefit obligations to be paid in the future over a long period of time, much like a mortgage. The money received from the state and RSA’s investment income is used to make the “mortgage payment” on this obligation and the unfunded liability is being systematically paid off.
The RSA has some other big numbers that can put the unfunded liability into context: $15 billion is the amount of only five years of benefit payments made to RSA members; the RSA paid out roughly $3.1 billion in benefits in fiscal year 2015. The RSA has generated $15.3 billion in investment returns since 2010 and as of September 30, 2015, had approximately $32 billion in assets, an increase of 28% since 2010. What other state entity generates that much income? Or holds that much in assets? Or pays as much into the Alabama economy?
At a time when prisons and Medicaid need hundreds of millions more each year, the state’s contribution to the RSA has remained stable or declined. In fact, the total amount the RSA receives from the General Fund (an estimated $64 million) is less than the shortfall faced by Medicaid under the current General Fund budget ($85 million). In addition, RSA’s total employer contribution request for fiscal year 2017 is still below the 2009 employer contribution amount. This is not a system in crisis.
Why are the groups who want more pension reform ignoring the extensive reforms that have already occurred and RSA’s good financial health? The reason is that the prior reforms do not align with those being pushed by outside special interests who have an agenda other than doing what is best for the state of Alabama, its taxpayers, education and public employees. These groups, funded by Wall Street billionaires who may stand to profit from changes, have been using the same tactics in other states to undermine public pensions in hopes of enacting reforms that will eventually shift public employees to 401k style retirement plans. This shift will not save money or decrease the unfunded liability and could in fact increase costs to the state and taxpayer and undermine the financial stability of the entire pension system.
Make no mistake, those yelling “crisis and reform” are after the money!
David G. Bronner is CEO of the Retirement Systems of Alabama.