The state should ensure that excessive resources are not committed to funding teachers' pension systems.
As of September 30, 2014, the most recent date for which an actuarial valuation is available, Alabama's pension system for teachers is 67.5 percent funded, an increase of one percentage point since 2012. Its pension debt exceeds $13,000 per pupil throughout the state. It also has an amortization period of 29.8 years, meaning that if the plan earns its assumed rate of return of 8.00 percent and makes its full actuarially determined contribution payments, it would take the state 29.8 years to pay off its unfunded liabilities. Alabama's funding ratio does not meet conventional standards, and the state's system is not financially sustainable according to actuarial benchmarks.
In addition, Alabama commits excessive resources toward its teachers' retirement system. The current employer contribution rate of 10.82 percent, while slightly lower than the rate reported in the FY14 valuation, remains too high, in light of the fact that local districts and teachers must also contribute 6.2 percent to Social Security. While this rate helps the state to pay off liabilities, it does so at great cost, precluding Alabama from spending those funds on other, more immediate means to retain talented teachers. The mandatory employee contribution rate to the defined benefit plan of 6 percent for Tier 2 members is reasonable.
Teachers' Retirement System of Alabama, Report of the Actuary on the Annual Valuation, Prepared as of September 30, 2014.
Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded and had an amortization period of less than 30 years to allow more protection during financial downturns. Alabama should consider ways to improve its funding level without raising the contributions of school districts and teachers. In fact, the state should work to decrease employer contributions. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention and crowd out funding for other areas in education. Improving funding levels necessitates, in part, systemic changes in the state's pension system. The goals on pension flexibility and pension neutrality provide suggestions for pension system structures that are both sustainable and fair.
Alabama did not respond to repeated requests to review this analysis.