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Public pensions in Alabama

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Alabama public pensions
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Pension system
Number of pension systems 3
State pension systems: Employees' Retirement System, Teachers' Retirement System, Judicial Retirement Fund
System type: Defined benefit plan
Pension health (2012)[1]
Fund value: $28,136,858,789
Estimated liabilities: $42,516,832,628
Unfunded liabilities : $14,379,973,839
Percent funded: 66.2%
Percent funded change: Decrease.svg0.7%[2]
Percent funded rank: 29[3]
Pension fund members (2011)
Total members: 367,114
Active members: 218,297
Other members: 148,817
Other state pension information
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Public pensions
State public pension plans
Public pension health by state
Alabama public pensions are the state mechanism by which state and local government employees in Alabama receive retirement benefits. In Alabama, there are three distinct retirement systems, each of which is overseen by the Retirement Systems of Alabama (RSA). These three systems are the Employees' Retirement System (ERS), the Teachers' Retirement System (TRS) and the Judicial Retirement Fund (JRF). ERS provides benefits to "state employees, state police, and on an elective basis to qualified persons of cities, towns, and quasi-public organizations."[4] TRS provides benefits to qualified employees of state-sponsored educational institutions, and JRF provides benefits to qualified judges and justices.[5][6] According to U.S. Census data, there were seven locally administered pension plans in Alabama as of fiscal year 2010.[7]

A 2012 report from the Pew Center on the States noted that Alabama's pension system was funded at 70 percent at the close of fiscal year 2010, well below the 80 percent funding level experts recommend. Consequently, Pew designated the state's pension system as cause for "serious concern."[8]

The funded ratio for the state's pension system decreased from 79.4 percent in fiscal year 2007 to 66.2 percent in fiscal year 2012, a decrease of 13.2 percentage points, or 16.6 percent. Likewise, the system's unfunded liabilities increased from just under $8 billion in fiscal year 2007 to more than $14 billion in fiscal year 2012.[9]

In light of the pension system's broadening funding gap, the Alabama State Legislature passed significant pension reforms in the spring of 2012. These reforms were signed into law by Governor Robert Bentley on May 13, 2013 and would most profoundly impact employees entering the pension system on or after January 1, 2013.


Pension plans

Within the Retirement Systems of Alabama, there are three component systems:

  1. Employees' Retirement System
  2. Teachers' Retirement System
  3. Judicial Retirement Fund

In fiscal year 2012, according to the RSA's Actuarial Valuation Reports, the state had a total of 218,297 active members in its retirement plans.[10][11][12] Our membership figures divide plan participants into two broad categories: active and other. Active members are current employees contributing to the pension system. Other members include retirees, beneficiaries and other inactive plan participants (usually terminated employees entitled to benefits but not yet receiving them).[13]

The following data was collected from the state's 2012 Actuarial Valuation Reports, which measured fund status as of September 30, 2012. Valuation reports are annual reports produced by outside consultants, using unaudited data provided by the pension systems themselves, in order to determine what employers in the system should contribute in the coming year to maintain or improve the fiscal health of the pension funds.

The Retirement Systems of Alabama (RSA) Valuation Reports for 2012 were produced by Cavanaugh MacDonald Consulting, LLC, a Georgia-based firm that exclusively provides financial consulting to public sector pension and health care plans to governments throughout the United States.[14] The "percentage funded" is calculated by taking the current value of the fund and dividing by the estimated amount of total liabilities. The current fund value is calculated assuming an 8 percent rate of return. The Government Accountability Office (GAO) and Pew Research Centers cite a percent funded ratio of 80 percent as the minimum threshold for a healthy fund, though the American Academy of Actuaries suggests that all pension systems "have a strategy in place to attain or maintain a funded status of 100 percent or greater."[15][16] The column "SBS figure" refers to a market liability calculation of the fund by the nonprofit organization State Budget Solutions. This analysis uses a rate of return of 3.225 percent, which is based upon the 15-year Treasury bond yield. The organization calls this a "risk-free" rate of return, which would make it easier for states to hit their pension requirements in the future. Since 2006, all private sector corporate pension plans have incorporated market costs into their funding schemes.[17]

Basic pension plan information -- Retirement Systems of Alabama (RSA)
Plans Current value Percentage funded Unfunded liabilities Membership
State figure SBS figure[18] State figure SBS figure[18]
Employees' Retirement System[10] $9,116,551,305 65.7% N/A[19] $4,768,444,247 N/A[19] 84,169 active members
Teachers' Retirement System[11] $18,786,007,955 66.5% $9,465,359,317 133,791 active members
Judicial Retirement Fund[12] $234,299,529 61.6% $146,170,275 337 active members
TOTALS $28,136,858,789 66.2% 34% $14,379,973,839 $55,279,430,000 218,297 active members

Annual Required Contribution

Annual Required Contributions (ARC) are calculated annually and are a sum of two different costs. The first component is the "normal cost," or what the employer owes to the system in order to support the liabilities gained in the previous year of service. The second component is an additional payment in order to make up for previous liabilities that have not yet been paid for. According to a report by the Pew Center on the States, between 1999 and 2008, Alabama paid 100 percent of its annual required contribution.[20][21]

On June 25, 2012, the Government Accounting Standards Board (GASB) approved a plan to reform the accounting rules for state and local pension funds. These revised standards were set to take effect in fiscal years 2013 and 2014.[22] As a result, ARCs were removed as a reporting requirement. Instead, plan administrators and accountants will use an actuarially determined contribution or a statutory contribution for reporting purposes.[23]

ARC historical data[9]
Fiscal year Teachers' Retirement System Employees' Retirement System Judicial Retirement Fund
Annual Required Contribution (ARC) Percentage contributed Annual Required Contribution (ARC) Percentage contributed Annual Required Contribution (ARC) Percentage contributed
2012 $618,306,000 100% $317,520,000 100% $10,747,000 100%
2011 $779,644,000 100% $394,998,000 100% $10,906,000 100%
2010 $776,421,000 100% $377,898,000 100% $10,814,000 100%
2009 $753,518,000 100% $451,139,000 100% $10,326,000 100%
2008 $729,995,000 100% $329,339,000 100% $9,880,000 100%

Historical funding levels

Between 2007 and 2011, the plans managed by RSA gained more than $4.8 billion in liabilities, but lost more than $1.5 billion in value. This poor fund performance increased the collected unfunded liability by more than $4.8 billion, reducing the funded ratio of the plans by 12.5 percentage points.[9]

Historical pension plan data - RSA
Year Value of assets Accrued liability Unfunded liability Funded ratio
2007 $30,687,002,000 $38,657,817,000 $7,970,815,000 79.4%
2008 $30,977,314,000 $40,206,232,000 $9,228,918,000 77.0%
2009 $30,763,098,000 $41,634,554,000 $10,871,456,000 73.9%
2010 $30,118,307,000 $42,942,101,000 $8,264,125,000 70.1%
2011 $29,122,163,000 $43,536,747,000 $14,414,584,000 66.9%
Change from 2007-2011 -$1,564,839,000 $4,878,930,000 $6,443,769,000 -12.5%

Rate of return

As of the 2012 RSA Comprehensive Annual Financial Report, Alabama presumed an 8 percent rate of return on its pension investments.


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.[8] Critics assert that this assumption is unrealistic, citing changing market conditions and significantly lower investment returns across the board over the past several years.[24] When states lower the rate of return in an effort to predict investment earnings accurately, it increases the current plan liabilities, thereby lowering the percent funded ratio and causing the ARC to increase. 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.[25] 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.[26] 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.[27]

The 2008 financial crisis had a devastating effect on pension plans nationwide and resulted in slower economic growth and increased market volatility. In light of this, some market strategists find the 8 percent assumption to be overly ambitious. Stanford University Finance Professor Joshua Rauh stated that using past investment performance in this economic climate was "dangerously optimistic."[28] Advocates for a lower assumed rate of return argue that the standard 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, the fund would have a surplus and smaller future ARCs, which would be preferable to using optimistic assumptions and potentially being caught with larger-than-expected deficits.[29][30][31][32][33]

On the other hand, traditional public pension plan advocates argue that the dip observed in recent years is not sufficient proof of 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."[28]

The National Association of State Retirement Administrators compiled data on the median annualized rate of return for public pensions for the 1-, 3-, 5-, 10-, 20-, and 25-year periods ending in 2013. While the median annualized rate of return failed to meet the 8 percent assumption that most public pensions assume over the 5- and 10-year periods, it was just shy (7.9 percent) over the 20-year period, and it exceeded 8 percent for the 1-, 3-, and 25-year periods. It is important to note that the NASRA data is reporting the median returns, indicating that even though median annualized returns exceeded 8 percent in the 25-year period, the investment portfolios for half of the examined public pension funds failed to meet an 8 percent assumed rate of return.[34]

In September 2013, the nonprofit organization State Budget Solutions published an analysis of state pension funding levels. In its calculations, State Budget Solutions used a 3.2 percent rate of return, the 15-year Treasury bond yield as of August 21, 2013, to discount plan liabilities.

The research found that in all states combined, state public employee pension plans have only 39 percent of the assets they need to cover their promised payments—a $4.1 trillion gap. According to the report, Alabama's public pension plans were 34 percent funded, making it the 31st most funded state.[35]

Moody's report on adjusted pension liabilities

On June 27, 2013, Moody's Investor Service released its report on adjusted pension liabilities in the states. The Moody's report ranked states "based on ratios measuring the size of their adjusted net pension liabilities (ANPL) relative to several measures of economic capacity." In its calculations of net pension liabilities, Moody's employed market-determined discount rates (5.14 percent for Alabama) instead of the state reported assumed rates of return (8 percent for Alabama).[36]

The report's authors found that adjusted net pension liabilities varied dramatically from state to state, from 6.8 (Nebraska) percent to 241 (Illinois) percent of governmental revenues in fiscal year 2011.[36]

The adjusted net pension liability for Alabama's pension system (excluding the Judicial Retirement Fund, which Moody's did not include in its analysis) in fiscal year 2011 was ranked 28th.[36] The following table presents key state-specific findings from the Moody's report, as well as the state's national rank with respect to each indicator.

Adjusted net pension liabilities (ANPL) relative to key economic indicators - Alabama
Governmental revenue* Personal income State GDP Per capita
State findings 36.9% 4.3% 4.2% $1,511
National ranking 30th 29th 29th 32nd
*Moody's uses governmental revenues as reported in each state's consolidated annual financial reports; this includes not only state-generated revenue, but federal funds, as well.[36]

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.[37]

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. Compared to surrounding states, Alabama had significantly lower total management fees, and a higher 5-year rate of return for the pension fund.

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 a percentage of total net assets at the beginning of the year Five-year rate of return for the pension fund
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."[37]
Source: Maryland Public Policy Institute, "Wall Street Fees, Investment Returns, Maryland 49 Other State Pension Funds," July 1, 2013


Enacted reforms


SB 303

On May 13, 2013, Governor Robert Bentley signed into law SB 303, which altered the membership of the Board of Control of the Teachers' Retirement System, increasing the number of trustees from 14 to 15 and removing the Executive Secretary of the Alabama Education Association as a member of the board, and provided for 12 elected members (up from 10 previously).[38]


SB 388

On May 14, 2012, Governor Bentley signed into law SB 388, which made significant reforms to the state's Employees' Retirement System and Teachers' Retirement System. Employees who become members of either retirement system on or after January 1, 2013 will be enrolled in a newly created second benefit plan. This plan requires members to contribute a portion of their salaries to the plan and establishes new minimum age (62 years old for most employees; 56 years old for correctional officers, law enforcement officers and firefighters with 10 years of service) and service requirements . The law also stipulates that the plan be administered by the Retirement Systems of Alabama.[39] The enacted reforms were expected to save state government in excess of $5 billion dollars over 31 years.[40]

Proposed reforms


HB 32

HB 32 proposed to allow a member of the state's retirement systems who is away from work due a job-related injury and receiving workers' compensation benefits to continue making contributions to his or her retirement system at a rate commensurate with what he or she would have contributed had he or she been receiving regular compensation from the employer. HB 32 passed the House on April 24, 2013, then moved to the Senate. It was referred to the Governmental Affairs Committee, which reported favorably on the bill. The Senate adjourned on May 20, 2013, however, without having taken a vote on the bill.[41]


HB 616

HB 616 proposed a constitutional amendment to allow specified elected and appointed officials in Cullman County, Alabama to participate in the Employees' Retirement System, lifting an existing prohibition on such participation. As a result, no elected or appointed official in Cullman County would be eligible to assume a supernumerary office after the effective of the amendment. HB 616 passed the House on April 12, 2012, then moved to the Senate, where it was referred to the Constitution, Campaign Finance, Ethics and Elections Committee. The Senate adjourned, however, without having taken a vote on the bill.[42]

Local public pensions

See also: Local government public pensions

According to the U.S. Census Bureau, the state has seven locally administered pension plans. These are Jefferson County General Retirement System, Montgomery County Retirement System Fund, Anniston Police and Firemen's Retirement Fund, Birmingham Retirement and Relief System, Birmingham Firemen's and Police Supplement Pension System, Montgomery Employees Retirement System and Tuscaloosa Fireman and Policemen's Pension and Relief Plan.[43]

Prichard, Alabama's pension system went bankrupt in 2009. The city had sought bankruptcy protection twice, but was denied. In 2010, the city stopped issuing pension payments to its retired employees.[44]


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.[9] An investment summary is provided for each pension fund in this report.
  • The system discloses liabilities in its Comprehensive Annual Financial Report.[9]
  • The system posts its Comprehensive Annual Financial Report online, which includes an audit by an external auditing firm.[9]

Recent news

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All stories may not be relevant to this page due to the nature of the search engine.

Alabama Public Pensions News Feed

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See also

Additional reading

External links


  1. Figures below are compiled by adding up all state pension plans
  2. This figure is derived by calculating the percent difference between the current year's funding level and the system's percent funded from the prior year.
  3. Rank is relative to the 50 state pension programs. "1" refers to the healthiest pension plan while "50" would be the least well-funded plan.
  4. The Retirement Systems of Alabama, "Employees' Retirement System," accessed October 22, 2013
  5. The Retirement Systems of Alabama, "Teachers' Retirement System," accessed October 22, 2013 (dead link)
  6. The Retirement Systems of Alabama, "Judicial Retirement Fund," accessed October 22, 2013
  7. “Public Employee Retirement Systems State- and Locally-Administered Pensions Summary Report: 2010”, United States Census Bureau, released April 30, 2012
  8. 8.0 8.1 "The Widening Gap Update,” Pew Center on the States, accessed October 17, 2013
  9. 9.0 9.1 9.2 9.3 9.4 9.5 Retirement Systems of Alabama, "Comprehensive Annual Financial Report for the Fiscal Year Ended September 30, 2012," accessed October 22, 2013
  10. 10.0 10.1 "Report on the Actuarial Valuation of the Employees’ Retirement System of Alabama," accessed October 22, 2013
  11. 11.0 11.1 "Report on the Actuarial Valuation of the Teachers' Retirement System of Alabama," accessed October 22, 2013
  12. 12.0 12.1 "Report on the Actuarial Valuation of the Judicial Retirement Fund," accessed October 22, 2013
  13. Organisation for Economic Co-operation and Development, "Pensions Glossary," accessed November 27, 2013
  14. Cavanaugh MacDonald Consulting, LLC "About Us," accessed October 22, 2013
  15. United States Government Accountability Office Report to the Committee on Finance, U.S. Senate, "State and Local Government Retiree Benefits: Current Status of Benefit Structures, Protections, and Fiscal Outlook for Funding Future Costs," September 2007. accessed October 23, 2013
  16. American Academy of Actuaries, "Issue Brief: The 80% Pension Funding Standard Myth," July 2012. accessed October 23, 2013
  17. Governing Magazine, " Is There a Plot Against Pensions?" October 14, 2013
  18. 18.0 18.1 State Budget Solutions, "Promises Made, Promises Broken - The Betrayal of Pensioners and Taxpayers," accessed September 20, 2013
  19. 19.0 19.1 Analysis only available for system totals and not individual funds.
  20. "The Trillion Dollar Gap: Alabama," February 18, 2010
  21. Government Accounting Standards Board, "Annual Required Contribution (ARC)," accessed October 17, 2013
  22. Reuters, "Little-known U.S. board stokes hot pension debate," July 10, 2012
  23. State Budget Solutions, "GASB's ineffective public pension reporting standards set to take effect," June 5, 2013
  24. The New York Times "Public Pensions Faulted for Bets on Rosy Returns," May 27, 2012
  25. Benefits Magazine "Public Pension Funding 101: Key Terms and Concepts," April 2013. accessed October 23, 2013
  26. Crain's Chicago Business "State teachers pension board lowers expected rate of return," September 21, 2013. accessed October 23, 2013
  27. Huffington Post "California Pension Funds Expect Lower Investment Return," March 14, 2012. accessed October 23, 2013
  28. 28.0 28.1 Governing "Expert: Governments Are Masking Their Pension Liabilities ," October 25, 2013. accessed October 25, 2013
  29. The Washington Post "Kansas’s pension funding gap just grew by $1 billion," September 6, 2013. accessed October 25, 2013
  30. Topeka Capital-Journal "KPERS' unfunded liability rises to $10.2B," September 4, 2013. accessed October 25, 2013
  31. Wall Street Journal "Pensions Wrestle With Return Rates," October 10, 2011. accessed October 23, 2013
  32. The Courant "Promising Too Much On Public Pensions," August 10, 2012. accessed October 23, 2013
  33. Business Wire "NCPERS 2013 Survey: Public Pension Plans Report Increasing Confidence, Lower Costs, Growing Returns," October 22, 2013. accessed October 25, 2013
  34. National Association of State Retirement Administrators "Issue Brief: Public Pension Plan Investment Return Assumptions," October 2013. accessed October 23, 2013
  35. State Budget Solutions, "Promises Made, Promises Broken - The Betrayal of Pensioners and Taxpayers," accessed September 20, 2013
  36. 36.0 36.1 36.2 36.3 Moody's Investor Service, "Adjusted Pension Liability Medians for US States," June 27, 2013
  37. Cite error: Invalid <ref> tag; no text was provided for refs named report
  38. "SB 303/Act No. 2013-239," approved May 13, 2013
  39. "SB 388/Act No. 2012-377," approved May 14, 2012
  40. "Fiscal Notes for SB388 (Regular Session 2012)," June 19, 2012
  41. "HB 32," accessed October 22, 2013
  42. "HB 616," accessed October 22, 2013
  43. U.S. Census, Pension Report, Unit ID file, accessed July 18, 2013
  44. The New York Times, "Alabama Town’s Failed Pension Is a Warning," December 22, 2010