A new report on Alabama’s public pension system offers some startling facts on the system’s woes, but offers a prescription for reform that could be a blueprint for Mississippi’s system.
The report by the Mercatus Center’s Eileen Norcross, working with the Manuel H. Johnson Center for Political Economy at Troy University, highlighted the problems with Retirement Systems of Alabama, which manages the pensions of Alabama government employees.
According to its annual 2013 report, Mississippi’s system is facing unfunded liabilities totaling $15 billion.
Nationwide, government pension plans are facing an unfunded liability of $4 trillion. If you’re keeping score at home, that’s a lot of zeros.
According to the report, the size of Alabama’s unfunded pension liability is 37 times larger than the state’s debt, which was $1.59 billion in 2012. With a gross domestic product of $183 billion in 2012, Alabama’s liability would be a third of the state economy.
The problem is simple: too many retirees and not enough benefit-paying workers. With more of the Baby Boomer generation reaching retirement age in the next decade, the problem is going to get worse without serious reform. The number of retirees in PERS climbed from 86,229 in 2012 to 90,214 in 2013.
Like many other pension systems, both the RSA and PERS use accounting practices —such as linking plan liabilities to the expected performance of investments over a long period — that often obscure the potential peril faced in the future when benefits paid out outweigh the contributions paid into the system.
Last year, PERS had a 13.4 percent rate of return on its investments, a huge increase over 2012, when the rate was a mere 0.6 percent. In 2012, the rate was 25.4 percent. Despite making $2.6 billion in investment income in 2013, the funding level of the plan is only at 57.7 percent, far off the benchmark 80 percent level. Alabama’s system is slightly better at 62 percent.
Even with an improved economy, increased rates of return aren’t enough to cover the increased amount of benefits paid to more and more retirees.
“Because of this accounting mistake these plans are making, they feel they have to get a certain rate of return to fund the benefit,” Norcross said. “All you have to do the fund the benefit is accurately calculate how much you’re promising years from now and put the money into the system. Because they are valuing their liability by what they think they can make in investments, they push that rate of return higher. It makes the liability look smaller, but it puts the pressure on them to push these high rate of returns.”
According to Joe Luppino-Esposito of State Budget Solutions, this long-term trend doesn’t bode well for the future of public pension funds.
“These funds calculate a discount rate by using too large of a period to predict returns,” Luppino-Esposito said. “This is especially problematic in the near future as Baby Boomers are exiting the workforce. The expected rates of returns 25 years from now do little to pay for the pensions of the millions of employees who will retire in the next 10 years.
“A market-based discount rate is more important now than ever: interest rates are near all-time lows, we are in the midst of a slow recovery, and those millions of retirees will stress the system to its breaking point,” he said.
According to the report, Alabama’s plan managers have an incentive to take on riskier investments that promise a greater rate of return to cover shortfalls in benefit payments.
Alabama’s system invests heavily in the state, including a system of golf courses known as the Robert Trent Jones Golf Trail, real estate including RSA Towers in Mobile and Montgomery and media such as newspapers and broadcasting. While the RSA’s site is filled with references to the golf trail and its real estate holdings, the actual earnings from those assets haven’t performed well.
“I don’t like it because the pension is a trust for the employees,” Norcross said. “I think when you use state contributions for a secondary purpose, it confuses the primary mission there. When you use tax dollars to attract business to the state, you could argue that’s not a good strategy in of itself.
“The pension system tends to claim credit for all of these jobs and all of these great outcomes, but they haven’t performed so great in the last few years. This secondary purpose blinds them (the RSA) to their primary purpose and that is to cover the benefits paid out”
The prescription for reform Norcross advocates in her report are multifold:
- Accurate accounting: Lawmakers need an accurate picture of the tradeoffs necessary to keep funding benefits.
- Defined benefit contributions: Norcross said Alabama needs to close enrollment in the present plan and transition to a defined contribution plan that would give employees more control over their retirement savings.
Don’t look for reform in Mississippi in the next legislative session with an election year looming.
Luppino-Espito warns that time is running out for the nation’s public officials to come to grips with the pending crisis. Lawmakers have a choice: either take a slightly painful reform path now or wait until the reform is required and the pain threshold increases.
“Reforming these plans today means that politicians will not be able to keep kicking the can down the road,” Luppino-Esposito said. “Pension reform is not a simple battle. It is always contentious issue that rarely results in an easy solution that everyone can agree to. As hard as pension reform might be, it is better to handle it now. An implosion of the system would hurt pensioners and taxpayers.”
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PHOTO:By Steve Wilson – TALL BUILDINGS: The Retirement Systems of Alabama owns the tallest building in Mobile, the RSA Tower.
By Steve Wilson | May 22, 2014 | MississippiWatchdog.org