Alabama Retirement Systems, Montgomery, should close its three statewide defined benefit plans to new hires, create a new defined contribution plan and reduce investing in economic development in the state, according to a report issued this week by Troy (Ala.) University's Manuel H. Johnson Center for Political Economy.
Other recommendations in the report, “Pension Reform in Alabama: A Case for Economic Accounting,” include valuing plan liabilities through fair-market valuation rather than smoothing, increasing state contributions and changing benefit formulas for current DB plan participants, and improving disclosure of investments.
The report states that Alabama's three statewide pension funds managed by the retirement system — Teachers' Retirement System, Employees' Retirement System and Judicial Retirement Fund — have combined assets of $28 billion and total liabilities of $42 billion for a funding ratio of 67%.
“The valuing of liabilities based on expected asset returns results in unrecognized funding gaps due to insufficient contributions and risky investment policies,” according to the report, commissioned by Troy University and written by Eileen Norcross, lead researcher for the State and Local Policy Project at the Mercatus Center at George Mason University, Arlington, Va. “In addition, this accounting mishap encourages plan fiduciaries to embrace greater investment risk to make up for losses. The (retirement system) has increased its exposure to high-risk investments over the decade.”
The report also questions the retirement system's 10% allocation to economically targeted investments in the state, specifically its 1993 investment in 12 golf courses known as the Robert Trent Jones Golf Trail. “Effectively, Alabama has subsidized economic development with employee pension contributions, and passed on the risk of higher taxes and lower benefits to Alabama residents.”
Leura Canary, the retirement system's general counsel, said the Troy report “is inaccurate and misleading. … (the retirement system) is not going to run out of money.” She said the two main pension funds — the teachers' and state employees' funds — have averaged almost 11% returns per year over the last four years. And, she added, the pension funds have exceeded the retirement system's 8% expected return rate over the last 25 years.
The retirement system “values its employer contribution rates, assets and liabilities using accepted actuarial practices in accordance with public pension industry standards,” Ms. Canary said.
