Public pensions in Alabama

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Public pensions in
Alabama
Policypedia pension logo-no background.png
General information (2013)
Total contributions:
$1,802,232,000
Employee contributions:
$757,095,000
Government contributions:
$1,045,137,000
Total payments:
$3,195,749,000
Total cash and investment holdings:
$33,251,180,000
Number of state and local pension systems:
10 (4 state systems, 6 local systems)
Active membership:
233,423
Inactive membership:
29,546
Pension health (2012)
Assets:
$28,136,859,000
Actuarial accrued liability (AAL):
$42,516,832,000
Unfunded actuarial accrued liability (UAAL):
$14,379,973,000
Funded ratio:
66.2%
UAAL per capita:
$3,051
Public pensions
in the states
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Public pensionsState public pension plansAlabama state budget and finances
Note: This page utilizes information from a variety of sources. As such, the currency of the information varies somewhat. The information presented on this page reflects the most recent data available as of March 2015.
Alabama public pensions are the state mechanism by which state and many local government employees in Alabama receive retirement benefits.

According to the United States Census Bureau, there were 10 public pension systems in Alabama as of 2013. Four of these were state-level programs, while the remaining six were administered at the local level. As of 2013, membership in Alabama's various pension systems totaled 262,969. Of these, 233,423 were active members.[1]

According to reports based on the most recent available data, most states' pension plans continued to be underfunded below the 80 percent considered necessary for a healthy fund. Decreased funding and increasing liabilities since the 2008 recession continued to put pressure on local and state budgets, in some cases leading to bankruptcy. Higher pension costs can have the following consequences:[2]

  • higher taxes
  • less intergovernmental aid for services
  • lower credit ratings
  • higher interest rates on state borrowing
Between fiscal years 2008 and 2012, the funded ratio of Alabama's state-administered pension plans decreased from 77 percent to 66.2 percent. The state paid 100 percent of its annual required contribution, and as of fiscal year 2012, the pension system's unfunded actuarial accrued liability totaled $14.3 billion. This amounted to $3,051 in unfunded liabilities per capita.[2][3]

Background

See also: Historic Alabama pension information

Pension systems vary greatly across the states in their organization, management and accounting principles, and are extremely complicated and difficult to compare. The basic data on this page comes from the U.S. Census Bureau, as reported by the states and pension funds themselves for fiscal year 2013. Also included are comparative data from three different reports, which looked at the states' Comprehensive Annual Financial Reports (CAFRs). The Pew Center report and Morningstar had very similar data: both found that pension funds in the U.S. altogether were roughly 72 percent funded in 2012. The State Budget Solutions report, using a lower rate of return to calculate assets in the future, estimated that total unfunded liabilities in the United States rose from 4.1 trillion to 4.7 trillion between 2013 and 2014, and in aggregate pensions are only 36 percent funded. All three studies showed that the majority of state pension systems continue to be seriously underfunded. See the section on "Pension health" below for figures comparing Alabama to its neighbors in all three reports.

Key terms

Here are some key terms used in discussing pension funds and pension health.

  1. Actuarial accrued liability (AAL): The present value of all benefits owed to current and future retirees, based on the number of retirees and the promises made regarding benefits.
  2. Actuarial value of assets (AVA): The value of all the assets in the plan, which include investment gains and losses, depending on how the assets are valued.
  3. Unfunded actuarial accrued liability (UAAL): The difference between the total value of assets and accrued liability; the difference between what is owed to all beneficiaries enrolled in the plan and what funds are available to pay out to both current and future beneficiaries.
  4. Annual required contribution (ARC): An annual expense employers pay towards a pension plan made up of two parts: the "normal cost," or the amount paid towards the liabilities of the previous year, and an additional cost that attempts to pay for liabilities that have not yet been met.
  5. Funded ratio: A percentage expressing how fully a pension plan is funded, determined by dividing net assets by accrued liabilities. For example, if a plan has assets of $80 million, but liabilities of $100 million, it is 80 percent funded.
  6. Rate of return: The ratio of money earned or lost on an investment expressed as a percentage of the investment. For example, a $5.00 profit on a $100 investment is a 5 percent rate of return.
  7. Active member: A member of a pension plan either receiving benefits or making contributions.
  8. Inactive member: A member of a pension plan no longer contributing and not yet receiving benefits from that plan.

General information

See also: Pension data, U.S. Census

According to the U.S. Census, Alabama's state pension system, the Retirement Systems of Alabama, has four state pension systems and plans:

  1. Alabama State Employee Insurance Board
  2. Alabama Teachers Retirement System
  3. Alabama Judges Retirement Fund
  4. Alabama Peace Officers Annuity Benefit Fund[4]

In addition to the aforementioned state-level pension systems, there were six locally administered pension systems in Alabama.[1]

The table below provides general pension system information for Alabama and surrounding states.

General pension system information, 2013
State Systems Total members Active members Inactive members
State Local Members Percent of total Members Percent of total
Alabama 4 6 262,969 233,423 88.76% 29,546 11.24%
Florida 1 471 722,648 607,344 84.04% 115,304 15.96%
Georgia 10 24 670,198 402,790 60.1% 267,408 39.9%
Mississippi 4 0 293,905 162,455 55.27% 131,450 44.73%
Tennessee 1 14 283,137 247,390 87.37% 35,747 12.63%
Source: United States Census Bureau

Contributions

See also: Pension contribution data, U.S. Census

Pension contributions are the funds paid into pension systems. These contributions come from the employer (in the case of public pensions, the government) and employees. Investment earnings are the main source of increases in the fund and are listed separately to the right.

In fiscal year 2013, the most recent year for which information is available, total contributions of $1.8 billion were made to Alabama's state and local pension systems. Of this amount, $757.1 million came from employees. The remainder came from state and local governments. The table below provides information about pension contributions in Alabama and surrounding states in fiscal year 2013.[1]

Pension contributions, fiscal year 2013 (dollars in thousands)
State Total contributions from employees and employers Employee contributions Government contributions Earnings on investments
Contributions Percentage of total Contributions Percentage of total
Alabama $1,802,232 $757,095 42.01% $1,045,137 57.99% $4,338,491
Florida $4,314,456 $1,280,521 29.68% $3,033,935 70.32% $20,082,030
Georgia $2,786,217 $771,885 27.7% $2,014,332 72.3% $13,327,765
Mississippi $1,464,067 $550,047 37.57% $914,020 62.43% $2,673,187
Tennessee $1,584,479 $321,690 20.3% $1,262,789 79.7% $4,299,832
Source: United States Census Bureau

Payments

See also: Pension contribution data, U.S. Census

Payments are the amounts paid to pension recipients by their pension plans. Pension payments include benefits and withdrawals. Benefits are the regular payments made by a pension plan to the plan's recipients. Pension beneficiaries may also withdraw funds before they are due to receive regular benefits.

In fiscal year 2013, Alabama's state and local pension systems made payments totaling $3.2 billion. The table below provides pension payment information for Alabama and surrounding states in fiscal year 2013. The columns labeled "Benefits," "Withdrawals" and "Other" indicate subsets of total payments. All dollar amounts displayed are multiplied by 1,000 ($240,000 is equal to $240,000,000).

Pension payments, fiscal year 2013 (dollars in thousands)
State Total payments Benefits Withdrawals Other
Alabama $3,195,749 $3,032,398 $106,928 $56,423
Florida $9,321,799 $8,646,349 $88,880 $586,583
Georgia $5,911,278 $5,682,504 $105,722 $123,052
Mississippi $2,206,114 $2,029,121 $108,536 $68,457
Tennessee $2,657,352 $2,505,227 $69,999 $82,126
Source: United States Census Bureau

Cash and investment holdings

See also: Pension data, U.S. Census

Investments are a crucial part of the pension process. The goal is that, by investing pension contributions, the pensioner will receive more money when he retires than he and his employer were able to contribute. These investments can come in the form of cash investments, short-term investments, securities or other investments. Cash investments are usually low-risk, short-term investments that have a lower rate of return than other types of investments. Short-term investments are riskier than cash investments, but have the potential for greater returns. Securities can refer to stocks or bonds and represent some form of financial value. As the values of these securities change, they can be traded to make a profit. While there are other applications to securities investments, this represents one of the most common practices.[5][6][7]

As of fiscal year 2013, Alabama's state and local pension systems held $33.2 billion in total cash and investment holdings. The table below summarizes pension system cash and investment holdings for Alabama and surrounding states. The columns labeled "Total cash and short-term investments," "Total securities" and "Total other investments" indicate subsets of the grand total. All dollar amounts displayed are multiplied by 1,000 ($240,000 is equal to $240,000,000).[1]

Total cash and investment holdings, fiscal year 2013 (dollars in thousands)
State Grand total Total cash and short-term investments Total securities Total other investments
Alabama $33,251,180 $899,195 $29,333,158 $3,018,827
Florida $163,785,916 $3,657,093 $135,199,658 $24,929,164
Georgia $82,222,704 $2,579,828 $79,285,360 $357,516
Mississippi $23,017,265 $1,071,566 $20,085,810 $1,859,889
Tennessee $45,050,770 $1,034,517 $41,077,655 $2,938,598
Source: United States Census Bureau

Pension health

Pension health is a term used to describe the overall state of pension systems. It can be difficult to gauge pension health in each state, but many studies use calculations to determine the average liabilities, unfunded liabilities, funded ratio and other data. Most experts believe that pension systems need to be funded at least 80 percent to be considered healthy. This information is then used to provide a snapshot of the state's overall pension health. This section provides information from three studies regarding the health of pensions in Alabama and neighboring states. They found the following:

  • According to the Pew Center, Alabama paid 100 percent of its required contribution, but its funded ratio was only 66 percent in fiscal year 2012.
  • According to Morningstar, the state had a per capita pension debt of $3,051 and a funded ratio of 66.2 percent in fiscal year 2012.
  • According to the State Budget Solutions report, based on a lower rate of return, Alabama had a per capita pension debt of $13,450 and a funded ratio of 31 percent in fiscal year 2013.

Pew research

See also: Pew Charitable Trusts pensions study, 2014

According to a 2014 report by the Pew Charitable Trust, “many states are seeing their pension debt continue to increase, despite reform efforts, because of missed contributions and the continued impact of investment losses.” The funding gap between what state pension systems have promised in benefits (liabilities) and current funding (assets) increased by $158 billion from 2010 to 2012 (14 percent), leaving state-run retirement systems with $915 billion in unfunded liabilities. Only 15 states made at least 95 percent of the required contributions (ARCs) for their pensions between 2010 and 2012; the aggregate shortfall in funding for all state plans was $21 billion.[8] Data on these state pensions come from the Comprehensive Annual Financial Reports (CAFRs) that each state’s pension plans prepared for fiscal year 2012 and include their own actuarial valuations based on “the expected rate of return on investments and estimates of employee life spans, retirement ages, salary growth, retention rates, and other demographic characteristics.”[9]

All dollar amounts displayed are multiplied by 1,000,000 ($240,000 is equal to $240,000,000,000).

Pew Charitable Trusts Pension Report, 2010-2012 (dollars in millions)
State 2012 Funded ratio Percent of ARC paid
Liability Unfunded ARC 2010 2011 2012 2010 2011 2012
Alabama $42,517 $14,380 $947 70% 67% 66% 100% 100% 100%
Florida $157,068 $28,956 $2,547 82% 82% 82% 107% 80% 59%
Georgia $86,384 $16,776 $1,375 85% 82% 81% 100% 100% 100%
Mississippi $35,290 $14,860 $767 64% 62% 58% 100% 101% 101%
Tennessee $40,069 $3,389 $1,003 90% 92% 92% 100% 100% 100%
Totals in the U.S. $3,298,643 $914,653 $87,213 75% 74% 72% 78% 77% 77%
Source: The Pew Charitable Trusts, "The Fiscal Health of State Pension Plans: Funding Gap Continues to Grow"

Morningstar report

See also: Pension data, 2013 Morningstar report

In 2013, independent investment research firm Morningstar released "The State of State Pension Plans 2013," a report detailing various metrics of pension system health in all 50 states. They found a $1.2 trillion gap in 2012 for the largest 100 U.S. public pension plans (according to the actuarial firm Milliman). Based on two key drivers in Morningstar’s analysis—the funded ratio and the unfunded actuarial accrued liability (UAAL) per capita—the fiscal solvency and management of these plans varies greatly. Overall they found that "more than half of all states fall below Morningstar’s fiscally sound threshold of a 70% funded ratio" and all state plans combined were "72.6% funded with a UAAL per capita of roughly $2,600.”[2]

According to Morningstar's research, Alabama's state pension system's pension plans were funded at a rate of 66.2 percent in fiscal year 2012. The table below provides state pension system health metrics for Alabama and surrounding states in fiscal year 2012. Figures in the columns labeled "Assets," "AAL" and "UAAL" are rendered in thousands of dollars (for example, $2,400,000 translates to $2,400,000,000). Figures in the remaining columns have not been abbreviated. To view the full report click here.

Pension health metrics, fiscal year 2012 (dollars in thousands)
State Assets Liabilities (AAL) Unfunded liabilities (UAAL) Funded ratio Unfunded liabilities per capita
Alabama $28,136,859 $42,516,832 $14,379,973 66.2% $3,051
Florida $127,891,781 $148,049,596 $20,157,815 86.4% $1,089
Georgia $68,054,871 $83,100,245 $15,045,374 81.9% $1,589
Mississippi $20,274,489 $34,933,825 $14,659,336 58% $4,983
Tennessee N/A N/A N/A N/A N/A
United States totals $2,157,578,916 $2,979,267,860 $821,688,945 72.40% N/A
Source: Morningstar, "The State of State Pension Plans 2013: A Deep Dive Into Shortfalls and Surpluses," September 16, 2013

State Budget Solutions report

See also: Pension data, State Budget Solutions report

State Budget Solutions is "a non-partisan, non-profit, national public policy organization with the mission to change the way state and local governments do business."[10] In November 2014 the organization released a research report that used a fair market valuation based on a discount rate of 2.743 percent to determine the unfunded liabilities of public pension plans. They concluded that "state public pension plans are underfunded by $4.7 trillion, up from $4.1 trillion in 2013. Overall, the combined plans' funded status has dipped three percentage points to 36 percent. Split among all Americans, the unfunded liability is over $15,000 per person."[11]

According to the State Budget Solutions report, Alabama 's pension plans were funded at a rate of 31 percent.

To read the full report, click here.

Note that all dollar amounts displayed (excluding those under the "Unfunded liability per capita" column) are multiplied by 1,000 ($240,000 is equal to $240,000,000).

Pension health metrics from the State Budget Solutions report, fiscal year 2013 (dollars in thousands)
State Assets Market Liability* Funded Ratio Unfunded Liability Unfunded Liability Per Capita Unfunded Liability as a Percentage of 2013 Gross State Product
Alabama $29,419,597 $94,436,581 31% $65,016,984 $13,450 34%
Florida $131,680,615 $315,080,836 42% $183,400,221 $9,380 23%
Georgia $70,119,741 $172,429,158 41% $102,309,417 $10,239 23%
Mississippi $20,928,447 $76,926,497 27% $55,998,050 $18,722 53%
Tennessee $36,680,782 $79,109,037 46% $42,428,255 $6,531 15%
United States totals $2,679,831,466 $7,416,319,293 36% $4,736,487,827 $15,052 29%
Source: State Budget Solutions: Promises Made, Promises Broken 2014: Unfunded Liabilities Hit $4.7 Trillion

Other factors

Rate of return

According to a 2012 analysis by the Pew Center for the States, most state pension plans assume an 8 percent rate of return on investments.[12] Critics assert that this assumption is unrealistic, citing changing market conditions and significantly lower investment returns across the board over the past several years.[13]

Using a lower rate of return to predict investment earnings accurately, however, increases the current plan liabilities. This would lower the percent funded ratio and require increased employer contributions (ARCs). This is because future plan liabilities are discounted based on the rate of return, so smaller expected investment returns result in larger actuarially accrued liabilities.[14] For example, on September 21, 2012, the Illinois Teachers Retirement System voted to lower its rate of return from 8.5 percent to 8.0 percent. This change increased the state's fiscal year 2014 ARC from $3.07 billion to $3.36 billion.[15] Similarly, when California's CalPERS reduced its projected annual rate of return from 7.75 percent to 7.5 percent in March 2012, it cost the state an additional $303 million for fiscal year 2013.[16]

Financial crisis

The 2008 financial crisis had a devastating effect on pension plans nationwide because of slower economic growth and increased market volatility. Some market strategists found the 8 percent assumption to be overly ambitious and "dangerously optimistic."[17] Advocates for a lower assumed rate of return argued that the standard 8 percent assumptions could cause pension fund managers to engage in more risky investments and imprudent stewardship of public funds. Further, if pension plans were using more conservative assumptions, such as the 3 or 4 percent assumed rate of return used in the private sector, and the plans grew more quickly than expected because of a higher rate of return, the fund would have a surplus and smaller future required contributions (ARCs), which would be preferable to using optimistic assumptions and potentially being caught with larger-than-expected deficits.[18][19][20][21][22]

Traditional public pension plan advocates argue that the dip in recent years does not prove there is a long-term downward trend in investment returns. According to Chris Hoene, executive director at the California Budget Project, "The problem with [the market rate] argument is there isn’t significant evidence other than the short term blip during the economic crisis that there’s been that shift. It’s a speculative argument coming out of a very deep recession."[17]

The National Association of State Retirement Administrators researched the median annualized rate of return for public pensions for the 1-, 3-, 5-, 10-, 20- and 25-year periods ending in 2013 and found it was 7.9 percent over the 20-year period, and exceeded 8 percent for the 1-, 3- and 25-year periods. It is important to note that the NASRA data reported the median returns, which means that median annualized returns of investment portfolios for half of the examined public pension funds failed to meet an 8 percent assumed rate of return.[23]

Studies and reports

Pension fund management fees

See also: Public pension fund management fees

In July 2013, the Maryland Public Policy Institute (MPPI) and the Maryland Tax Education Foundation released a report detailing the fees paid for the management of state pension systems. According to MPPI, the 10 state pension funds that paid the most in management fees relative to net assets experienced lower returns over a five-year period than the 10 state pension funds that paid the least in management fees. For example, in fiscal year 2012, South Carolina's pension system paid approximately $296.1 million in total management fees (1.31 percent of total net assets at the beginning of the fiscal year), and its five-year rate of return was 1.46 percent. By contrast, Alabama's pension system paid roughly $13.3 million in management fees (0.05 percent of total net assets), and its five-year rate of return was 7.53 percent.[24]

The table below presents the information collected by MPPI for Alabama and surrounding states. For each state's pension system, total net assets are listed (both for the beginning and end of the fiscal year in question), as well as the total amount paid in management fees. In addition, the rates of return for the pension systems are presented. In fiscal year 2012, Alabama paid the fewest total management fees when compared to surrounding states.

Public pension fund management fees, 2011-2012
State Fiscal year Total net assets at the beginning of the year Total net assets at the end of the year Total management fees Management fees as % of total net assets Five-year rate of return
Alabama 2012 $25,092,788,000 $28,374,703,000 $13,294,000 0.05% 7.53%
Florida 2012 $126,579,719,608 $119,981,464,834 $374,200,433 0.30% 1.56%
Georgia 2012 $69,563,890,000 $68,239,850,000 $53,014,039 0.08% 2.95%
Mississippi 2012 $20,840,987,000 $20,220,476,000 $47,575,948 0.23% 1.30%
Tennessee 2012 $33,663,308,000 $34,912,773,000 $32,379,360 0.10% 3.11%
1"Three states— Hawaii, Nevada and Rhode Island—were excluded because they hadn’t published CAFRs for fiscal years ending December 31, 2011 or later. West Virginia was excluded because its June 30, 2012 CAFR lacked sufficient disclosure."[24]
Source: Maryland Public Policy Institute, "Wall Street Fees, Investment Returns, Maryland 49 Other State Pension Funds," July 1, 2013

Transparency

See also: Public pension disclosure and Governmental Accounting Standards Board
  • The Retirement Systems of Alabama post key financial reports online. These include reports for each of the three funds and optional health and retirement accounts for public workers.
  • The total number of retirees receiving benefits and the total amount of benefits disbursed are posted on the RSA website. Actuarial reports for the ERS, TRS and JRF are available.
  • The amount of investments and assets are disclosed on the annual financial report.[25] An investment summary is provided for each pension fund in this report.
  • The system discloses liabilities in its Comprehensive Annual Financial Report.[25]
  • The system posts its Comprehensive Annual Financial Report online, which includes an audit by an external auditing firm.[25]

Recent news

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See also

External links

References

  1. 1.0 1.1 1.2 1.3 United States Census Bureau, "State- and Locally-Administered Defined Benefit Pension Systems - All Data by State and Level of Government: 2013," accessed March 23, 2015
  2. 2.0 2.1 2.2 Morningstar, "The State of State Pension Plans 2013: A Deep Dive Into Shortfalls and Surpluses," accessed September 16, 2013
  3. The Pew Charitable Trusts, “The Fiscal Health of State Pension Plans Funding Gap Continues to Grow,” accessed April 8, 2014
  4. U.S. Census, "2013 Survey of Public Pensions: State Data," accessed April 16, 2015. Note: To access this data, navigate to the bottom of the page and click "Unit ID file."
  5. Investopedia, "Cash investment definition," accessed April 6, 2015
  6. Investopedia, "Short-term investments definition," accessed April 6, 2015
  7. Investopedia, "Securities," accessed April 6, 2015
  8. The Pew Charitable Trusts, “The Fiscal Health of State Pension Plans: Funding Gap Continues to Grow,” accessed April 16, 2015
  9. The Pew Charitable Trusts, “The Fiscal Health of State Pension Plans Funding Gap Continues to Grow,” accessed April 8, 2014
  10. State Budget Solutions, "About SBS," accessed October 31, 2013
  11. State Budget Solutions, "Promises Made, Promises Broken 2014: Unfunded Liabilities Hit $4.7 Trillion," by Joe Luppino-Esposito, accessed November 12, 2014
  12. The Widening Gap Update, "Pew Center on the States," accessed October 17, 2013
  13. The New York Times, "Public Pensions Faulted for Bets on Rosy Returns," accessed May 27, 2012
  14. Benefits Magazine, "Public Pension Funding 101: Key Terms and Concepts," accessed October 23, 2013
  15. Crain's Chicago Business, "State teachers pension board lowers expected rate of return," accessed September 21, 2013
  16. Huffington Post, "California Pension Funds Expect Lower Investment Return," accessed March 14, 2012
  17. 17.0 17.1 Governing, "Expert: Governments Are Masking Their Pension Liabilities," accessed October 25, 2013
  18. The Washington Post, "Kansas’s pension funding gap just grew by $1 billion," accessed September 6, 2013
  19. Topeka Capital-Journal, "KPERS' unfunded liability rises to $10.2B," accessed September 4, 2013
  20. Wall Street Journal, "Pensions Wrestle With Return Rates," accessed October 10, 2011
  21. The Courant, "Promising Too Much On Public Pensions," accessed August 10, 2012
  22. Business Wire, "NCPERS 2013 Survey: Public Pension Plans Report Increasing Confidence, Lower Costs, Growing Returns," accessed October 22, 2013
  23. National Association of State Retirement Administrators, "Issue Brief: Public Pension Plan Investment Return Assumptions," accessed October 23, 2013
  24. 24.0 24.1 Maryland Public Policy Institute, "Wall Street Fees, Investment Returns, Maryland 49 Other State Pension Funds," July 1, 2013
  25. 25.0 25.1 25.2 Retirement Systems of Alabama, "Comprehensive Annual Financial Report for the Fiscal Year Ended September 30, 2012," accessed October 22, 2013