Pension Sustainability: Alabama

Analysis of Alabama's policies

As of September 30, 2009, the most recent date for which an actuarial valuation is available, Alabama's pension system for teachers is 74.7 percent funded and has an amortization period of over 30 years. This means that if the plan earns its assumed rate of return and maintains current contribution rates, it would take the state over 30 years to pay off its unfunded liabilities. Neither Alabama's funding ratio nor its amortization period meets 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 percent is 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 7.25 percent, up from 5 percent as of October 1, 2011, is reasonable, although close to excessive considering that teachers must also contribute to Social Security. The rate is set to increase further to 7.5 percent on October 1, 2012.

The rate is determined according to statutory requirements, which mandate that the employer contribution rate must be equal to an actuarially determined rate that accumulates sufficient assets to pay benefits when due. The rate was determined to be 12.75 percent to meet a 30-year amortization period; however, recent legislation lowered the employer contribution rate from 12.5 percent to 10 percent and raised the employee rate by 2.25 percent.

Citation

Retirement Systems of Alabama, Comprehensive Annual Financial Report for the Fiscal Year Ending Sept 30, 2010 http://www.rsa-al.gov/TRS/active-members.html HB123 http://www.rsa-al.gov/Legislation/house%20bills/HB123-enr.pdf

Recommendations for Alabama

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. However, 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. Improving funding levels necessitates, in part, systemic changes in the state's pension system. Goals  4-G and 4-I provide suggestions for pension system structures that are both sustainable and fair.

State response to our analysis

Alabama was helpful in providing NCTQ with facts that enhanced this analysis.