By Brandon Moseley
Alabama Political Reporter
Investing money can be difficult. Investors need to diligently research individual stocks, bonds, stock mutual funds, bond mutual funds, commodity funds, managed money accounts, exchange traded funds (ETFs), real estate investment trusts (REITs), hedge funds, etc. before making decisions about what to buy more of and what to sell and when. Opinions often vary wildly on how to pick investment vehicles but there is one principle that virtually all professional investors agree on and that is periodically you have to review investment performance. In December Morningstar released a report on state pension funds showing what most of us already knew. The Retirement Systems of Alabama (RSA) has underperformed at managing assets over the last decade.
According to Morning Star, in 2007 the RSA had total assets of $30.7 billion and pension liabilities of $38.7 billion. In 2008 assets climbed to almost $31 billion, but liabilities for state pensions climbed to $40.2 billion. In 2009 RSA’s assets dropped to $30.8 billion and liabilities climbed to $41.6 billion. In 2010 assets dropped to $30.1 billion but liabilities increased to $42.9 billion. Recognizing the problem, the state legislature increased the employees’ contributions to their own retirements (effectively lowering their take home pay.) Despite this reform, in 2011 RSA assets dropped to $29.1 billion while liabilities increased to $43.5 billion. The spread between assets and liabilities has grown from $8 billion in 2007 to $14.4 billion in 2011. In investing, facts are quantifiable. You either made money or you didn’t. Your mutual fund outperformed other mutual funds or it didn’t. According to independent analysis the RSA is one of the worst performing state pension funds in the country. The RSA is managed by Dr. David Bronner who has headed the fund since 1973. His previous employment was as a law professor at the University of Alabama.
‘The Alabama Political Reporter’ talked with state Representative Jim McClendon (R) from Springville about the situation on Thursday. McClendon said that you needed to look at the big picture McClendon said that you can’t compare current rates of returns versus their past rates of return. You have to compare the returns against the returns versus other pension funds in recent years the board has underperformed versus other pension funds. “This tells me that they could use financial advisers who have actual experience at managing money and a proven track record of success at managing money over time.” McClendon said that the poor performance is an indicator that the board is composed of people who do not understand or have experience in successfully managing money.
Alabama Education Association Executive Secretary Henry Mabry wrote in Monday’s ‘Alabama School Journal’, “TRS has a serious problem that needs to be addressed. In the last five years, the state and TRS (Teacher’s Retirement Systems – one of three pension plans run by RSA) members contributed $5.4 billion and benefits paid out were $8.1 billion. Investment income should have made up the difference but it did not. TRS actually lost $21.5 million in investment income instead of making up the $2.7 billion shortfall between contributions coming in and benefits going out. Last year, for instance, the state and employees contributed almost $1.1 billion, but costs were $1.9 billion. TRS assets are $2.6 billion lower than just over five years ago, or 12 percent down. This means benefits have been paid with savings for the future. Investments must improve or our members’ retirements are in jeopardy or out-of-pocket and state increases will rise, or both.”
Alabama State Senator Cam Ward (R) from Alabaster agreed in comments on Facebook on Thursday, “For several years in a row I have spoken with educators regarding my concern with the return on state pensions and how it was harming the state Education Trust Fund Budget. I caught a lot of heat for my comments. I have been concerned that the poor return which has led to the legislature having to spend more and more money to shore up the pension plan, could have been used instead to fund classrooms with supplies and other materials. I am glad to see the education community agree with me on that assessment in this article. For every dollar that RSA asks from the legislature to shore up sagging pension returns, is a dollar less for copy paper, school supplies and teaching materials.”
Rep. McClendon said, “We do know that Bronner dominates that board.” “The logical thing is to alter the composition of that board.” “AEA has reversed their position on RSA. I told them three years ago that changes need to be made.” McClendon said that the board needs to be composed of people with the appropriate knowledge to understand how to invest the money that the state and the state employees are giving them and who have a track record of successfully managing money. McClendon said however that to his knowledge nobody is introducing legislation to reform RSA in this session.
Mabry wrote, “The facts point to losses caused by alternative investments such as real estate. Over the past five years, almost $700 million has gone down a rat hole thanks to these “investments.” To put it in perspective, $700 million is more than twice what is spent on school transportation for the whole state or over 12,000 teacher units for a year. Economic development of the state is great and wonderful, but economic development at the expense of active and retired TRS members does not pass muster. It is their money and not to be used for someone’s monopoly game.”
Rep. Kurt Wallace (R) from Maplesville said on Facebook, “Since I have been elected I have had to take numerous beatings from AEA. Mostly because we (the legislature) said their TRS investments were one of the worst in the nation (based on several independent audits). They called us liars and thieves. As we were shelling out hundreds of millions of tax payer dollars to prop up their retirement system, they were constantly trashing us. Now, hear it from the ring leader Henry Mabry himself. I love my teachers and it’s good to finally here their leader say exactly what we’ve been saying all along. Now…maybe we can work together to fix a broken system.”
Sen. Ward said in December, “The solution I would offer is to restrict the investments of the RSA Board. Right now they invest a great deal in golf courses, hotels, airlines and other ventures that are very risky but in the name of promoting local tourism. The role of all pension managers around the country is to make sure the pension plan is solvent and has good returns for their retirees, not promoting tourism. Alabama has a Tourism Director so we don’t need the RSA Board doing that job as well. Their job is to invest in areas that will make a return for their retirees.”
Mabry wrote, “TRS is requesting almost $100 million more for next year. And next year they will be requesting another $100 million on top of that amount for the following year and the year after that will be no different. We have no choice but to get such amounts funded. If investment returns had not been so abysmal, then these multiple $100 million infusions of cash into the Retirement Systems could by providing much needed funding for textbooks, supplies, technology, professional development, PEEHIP cost increases, or additional pay every year.”