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Without Changes Pension Plan Could Bankrupt State

By Vernon Burns and Bill Britt
Alabama Political Reporter

A budget crisis overshadows Alabama as the legislature takes up the people’s business in Montgomery this week. However, a great financial beast stands just over the horizon that could bankrupt the entire state.

The Alabama state employee pension fund, known as RSA (Retirement Systems of Alabama), last year cost the taxpayers almost one billion dollars because of the investment shortfalls of the fund, this year the public coffers will have to forfeit at least another billion more to meet the fund’s legislated obligation.

Depending on whose math is used, the fund has an unfunded liability of between 12 billion and 40 billion dollar all of which goes to pay government employees’ retirement. According to a study by Novy-Marx & Rauh using standard accounting rules, the states has an unfunded liability of over 40 billion dollars or approximately 10 thousand dollars for every man, woman, and child in Alabama.

States generally use accounting measures that comply with the GASB (Governmental Accounting Standards Board). This method varies from general accounting metrics used for corporations. Some have compared GASB with the usual fuzzy math that allows governments to hide the actual cost from taxpayers.

How ever the number are calculated, no one with any real knowledge of the state’s pension plan disagrees that Alabama has a big problem.

Over the past decade, we have seen pensions bankrupt: GM, Chrysler and even the makers of Twinkie’s.

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The nation’s top state budget watchdog, State Budget Solutions, in a recent report stated, “States have been fooling the public and the federal government for years,” said Bryan Leonard, author of the study. According to the watchdog group, phony accounting methods have led to a crisis by allowing the real cost of state employee pension plans to be hidden from lawmakers and taxpayers.

In the past few months, Dr. Bronner the who has lead the RSA for almost 39 years has come under fire for the funds continual lost. He has defended himself in public by stating that the fund has lost money in the past few years because of his investment in Alabama. The RSA according to Bronner has a $25 billion fund, with 12 percent of that fund having been invested within the State of Alabama. This has raised questions as to how just 12 percent of the total investment fund could have pulled the entire value down so far. What is beyond question is that the fund, as it is currently managed, is an unsustainable liability for the state. One policy maker who did not want to go on the record at this time said, “The good doctor has taken the taxpayers’ money down the rabbit hole and I fear we will wake up to a nightmare once it resurfaces.”

Alabama Public Education System Employee Retirement Plan is the largest beneficiary of the total fund, therefore a look at this one portion will reveal a clearer picture of the fund’s liabilities. The following is based on information taken from “Teachers,” Retirement System of Alabama’s Report of the Actuary on the Annual Valuation Prepared as of September  30, 2010. This report was sent to Bronner and others in the system on July 22, 2010 by Cavanaugh MacDonal Consulting, LLC.

Alabama Public Education System Employee Retirement Plan includes all supervisory administrative personnel, all teachers, coaches, and instructors. Plus all support staff such as bus drivers, janitorial, maintenance, and food service workers. This plan is referred to by the state, in most public presentations, as The Teachers Retirement System. The union representing these public employees also uses the the term “teachers.” In both cases using the title of teacher as a cover for the Public Employee Retirement Plan or a labor union is misleading since teachers are a minority in both cases.

The Alabama Public Education System had, as of Sept. 30, 2010 (latest data available), 136,290 active employees and 77,428 retired. The listed compensation of the average active employee was $42,827.00 per year. This information is taken from the Teachers’ Retirement System of Alabama’s report of the actuary on the annual valuation prepared as of Sept. 30, 2010.

In the report, schedule G, page 24, is a chart describing classes of members based on age and years of employment with the average pay and total number of employees for each class. The average per class ranges from $22,483.00 per year to $116,995.00 per year.

In this report the bus drivers and support staff, degreed teachers, and top administrators are all lumped together, a more complete and detailed breakdown of these taxpayer-funded expenses is a requirement.

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First a review of the requirements, contribution rates, are needed to build an example case of a person working for and retiring from the Alabama Public Education System.

The basic requirement in the education system to be eligible for full retirement is to have been a full-time employee of the system for a minimum of 25 years. The employees contribution rate to the retirement fund, as a percentage of yearly pay was set at 5 percent until October 1, 2011, then it was increased to 7.25 percent for one year and from October 1, 2012, the rate will be 7.5 percent per year going forward. For a perspective, at the old contribution rate of 5 percent per year the employee will have, in a 25 year career, contributed 15 months (1 year and 3 months) of their pay to their personal lifetime pension. At the new top rate of 7.5 percent per year (starting October 1, 2012) the new employee will contribute 22.5 months (one year and 10-1/2 months) which is an increase of 7-1/2 months of their pay in 25 years for a taxpayer subsidized and insured lifetime of income.

Case study:

J. Doe was employed by the Alabama Public Education System for 25 years, Jan. 1, 1985-Dec. 31, 2010. J. Doe was 25 years old at the time of employment and retires at age 50. J’s pension will be based on an average of the high three years of the last ten years of employment, multiplied by J’s 25 years employment,  multiplied by 2.0125 percent. The assumption for J. is that the average of the high three years to be used for calculation is $50,757.00 per year. This assumption is made based on an average of the compensation rates shown on the systems’ current website for J’s age and years of employment group.

J’s pension is calculated as follows:

$50,757.00 x 25 x 0.020125 = $25,537.00 pension per year

Retiring at 50, J can expect to live an additional 30 years to age 80.

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At age 80 J’s total pension payout will have been $25,537.00 x 30 = $766,110.00 not including any cost-of-living increases.

To calculate what J has paid into the system we used the 5 percent contribution rate in effect before October 1, 2011 multiplied by 25 years of employment multiplied by J’s average compensation while employed. We will base our estimate on J’s average compensation on his high 3-year average being $50,757.00 per year and the total system as of Sept 30, 2010 average being $42,827.00 per year.  For J’s average over 25 years we will assume $38,500.00 per year. We know this is probably high, but J was a great employee.

For J’s total contribution, used 0.05 x 25 x $38,500.00 = $48,125.00.

Total pay out over 30 years = $766,110.00 with no cost of living increases

Total pay out over 30 years = $1,000,000,00 plus with minor cost of living increases

This one million dollar payout is for one average employee.

The Alabama Public Education System as of Sept. 30, 2010 had 136,290 active employees and 77,428 retired employees.

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This is the reason as of Sept. 30, 2010, the Public Education Employee Retirement Plan had an unfunded accrued liability of $8,166,744,391.00, (eight billion, one hundred sixty six million, seven hundred forty-four thousand, three hundred ninety-one dollars).

This unfunded liability has been steadily increasing every year back to 2005, the first year shown in the 2010 report. This review is only for the Alabama Public Education System Employee Retirement Plan, which is the largest of the plans.

This brings home what must be faced, head on with our eyes wide open, by everyone effected, from the citizens and taxpayers of Alabama in general, to the administrators, teachers, and support staff in the public education retirement plan. In fact, everything administrated by The RSA will, in time, have an effect on every citizen of our state.

Without major changes, this problem, which is actually already here, will put severe limits on state as well as local governments, and on the lives of every individual citizen. This unfunded accrued pension liability is a fiscal bomb that has already exploded it just seems no one has been listening. The promise made of a lifetime pension without limits on the cost and an evergrowing number of people promised that pension is unsustainable. Unfunded pension liabilities are now a leading cause of major private corporation bankruptcies in the United States.

In Summary:

Alabama Public Education Employee Retirement Plan unfunded liability = $8,166,744,391.00

Alabama State Employee Retirement Plan unfunded liability = $4,544,788,280.00

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Alabama Judicial Retirement Fund unfunded liability = $112,262,182.00

Alabama Pensions Total unfunded liability = $12, 823,794,853.00

Using private sector accounting rules, the fund has a projected unfunded liability of $40,400,000,000.

It still remains to be seen what, if anything, will be done with regard to the state employes’ pension plan. What is clear is that the taxpayers are looking at a deeper debt if nothing is done.

Written By

DIG DEEPER