Financial Health of Alabama's Two Largest Pension Funds Falters

By: David White -- The Birmingham News
By: David White -- The Birmingham News
 Key measures of the financial health of the Retirement Systems of Alabama

ARCHIVED PHOTO-Dr. David Bronner, CEO, Retirement Systems of Alabama. Leadership Class 20 State Government Day Montgomery. Bob Gathany photo.

MONTGOMERY -- Key measures of the financial health of the Retirement Systems of Alabama's two biggest pension funds have fallen 11 straight years, RSA records show.

Those measures, which compare fund assets to future pension payments, have trailed national averages for seven years in a row.

Alabama's government generally pays more to support the Teachers' Retirement System and Employees' Retirement System when those measures decline.

"You would prefer the funding ratio to be going up rather than going down," said Assistant Finance Director Bill Newton.

State Treasurer Young Boozer agreed, but he predicted the measures would

improve in coming years if stock markets provide reasonable returns.

"Obviously, the trend over the last 10 years is not good, but .¤.¤. I think we are at the bottom of that trend, and I would expect that it'll go up over the next five to 10 years," Boozer said.

Current and future assets held by the Teachers' Retirement System on Sept. 30, the end of the last fiscal year, totaled 67.5 percent of what it would need to make pension payments to retirees in coming decades, estimated the RSA's actuary, Cavanaugh Macdonald Consulting in Kennesaw, Ga.

The TRS on Sept. 30 had $19.43 billion in assets such as stocks, bonds and projected state payments in coming years. It faced $28.78 billion in future pension payments, the actuary estimated, for an unfunded liability calculated at $9.35 billion.

The TRS at that time covered 233,575 current and former teachers and other employees at Alabama's public schools, colleges, universities and related groups, Cavanaugh Macdonald reported.

The actuary also estimated that current and future assets held by the Employees' Retirement System on Sept. 30 totaled 65.8 percent of the amount it would need to make future pension payments.

The ERS that day had $9.46 billion in current and future assets and faced $14.37 billion in future pension payments, the actuary estimated, for an unfunded liability calculated at $4.91 billion.

The ERS covered 137,887 people, including 57,496 current or former employees of state agencies and 80,391 current or former employees of local governments and boards that participate in the system.

Time to recover

Several state officials stressed that the pension funds have decades to make up unfunded liabilities, perhaps through growth in investment income or higher payments from the state.

"Those liabilities include liabilities for people that just started to work, all the way up to 90-year-old retirees getting a pension. You don't need all that cash today," assistant state budget officer Kelly Butler said.

"It's a 30-year liability, and you've got time to weather the ups and downs of the market," he said.

Funding levels for the TRS and ERS have dropped steadily since the end of the 2000 fiscal year, when the levels of both pension plans exceeded 100 percent. Stock market declines about 11 years ago and in 2008 and early 2009 reduced the value of pension fund assets and are big reasons funding levels have dropped, said Boozer, who sits on the boards that oversee the TRS and ERS.

He noted that both pension plans have set a target of making average investment returns of 8 percent a year, but the average annual returns for the 10 years ending March 31 were lower: 5.23 percent for the TRS and 4.81 percent for the ERS.

"The funding percentages have dropped because investment performance has been less than the actuarial target," Boozer said. "That's the primary factor."

TRS and ERS funding levels also dropped after legislators approved increases in retirees' pensions starting in the 2001, 2003, 2006 and 2007 fiscal years without giving RSA the money to pay for the increases, officials said.

"That increases your liabilities. It does not increase your assets," Newton said.

State steps up

A drop in funding levels, also called funded ratios, is important, since the state as a rule contributes more money than it otherwise would pay to help keep the pension plans financially healthy.

State government's combined contribution to the TRS and ERS is expected to be $771 million this fiscal year, an increase of $460.9 million, 149 percent, in 10 years.

Cavanaugh Macdonald each year estimates the "annual required contribution" needed to help keep each pension plan financially sound. Newton said governors and legislators in Alabama over the decades consistently have appropriated those amounts for covered state employees and retirees.

RSA chief executive David Bronner sent a written statement that stressed the importance of the annual required contribution being paid. He said the response to a question of whether the decline in funding levels was a concern was from Cavanaugh Macdonald, but he agreed with it.

"Many people tend to think that funding level is the most important indicator of whether or not a pension plan is healthy," the statement said. "While it is certainly one component, the most important indicator is whether or not the ARC, or annual required contribution, is being made to the fund."

The statement noted that the state always has made the required contribution.

State Rep. Jay Love, R-Montgomery, predicted legislators would continue to make the annual required contributions to the TRS and ERS.

"We're going to do everything we can to maintain our responsibility," said Love, who chairs the committee in the House of Representatives that oversees the state education budget.

The TRS and ERS funding levels since fiscal 2005 have been lower than the annual weighted averages reported by the National Association of State Retirement Administrators, which surveys more than 120 state and municipal pension plans nationwide.

The national average funding level, or actuarial funded ratio, was 75 percent at the end of the 2011 fiscal year, estimated Keith Brainard, NASRA's research director, compared to 67.5 percent for the TRS and 65.8 percent for the ERS.

The TRS and ERS investment returns on stocks, bonds and other assets also lagged returns by many other pension funds nationwide over the five years and 10 years ending March 31.

For the five-year period, the median annual return for 75 public pension funds surveyed by State Street Investment Analytics was 2.86 percent, compared to returns of 0.89 percent for the TRS and 0.47 percent for the ERS.

For the 10-year period, the median annual return for the surveyed funds was 6.08 percent, compared to returns of 5.23 percent for the TRS and 4.81 percent for the ERS.

Newton said legislators and Gov. Robert Bentley last year and this year have taken steps that could help improve funding levels by increasing assets and reducing pension payments.

Deferrals end

He noted that lawmakers last year ended a costly deferred retirement option, which is expected to reduce future payouts, and required employees of state agencies and schools to pay more for pension coverage.

Most contributed 5 percent of their paychecks for pension coverage before Oct. 1, 2011, but since then have paid 7.25 percent. The rate will rise to 7.5 percent on Oct. 1.

Also, lawmakers this year passed a law that will reduce pension benefits for teachers and other public employees hired in 2013 and later. Cavanaugh Macdonald estimated the change will reduce state government's combined contributions to the TRS and ERS by $5.05 billion, 7.9 percent, over 30 years and nine months.

"We're now in the position of waiting and watching to see the effects of these major reforms and only years later making other changes if they're needed," Newton said.

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