Alabama State Pension Plan Misses Lofty Investment Predictions

Published January 19, 2016

The Alabama Teachers’ Retirement System, a public pension entitlement program providing benefits to public employees of K–12 school systems and colleges, missed its investment return goals for fiscal year 2015.

Domestic and international stock market investments for the year failed to meet the public pension fund’s projected 9 percent annual return on investment. The investments only grew by 1 percent. The difference between the fund’s estimates and actual performance, about $743 million, will be collected from taxpayers.

Risky Plans

Katherine Robinson, vice president of the Alabama Policy Institute, says state lawmakers can’t afford to gamble away taxpayers’ money.

“Facing a $200 million shortfall [in fiscal year 2015], the Alabama Legislature sent our pension system nearly $1 billion and will be asked to do so again in the coming year,” Robinson said. “The traditional defined-benefit plans that most states, including Alabama, adopted long ago are inherently risky for the employer [and] the state, as it is taxpayer dollars that make up any shortfalls when investment returns are lower than expected.”

Win-Win Reforms Suggested

Robinson says moving to a defined-contribution pension plan, like those enjoyed by taxpayers in the private sector, would benefit teachers and taxpayers alike.

“There would be benefits for both the employer and the employee, who will each contribute to the plan,” Robinson said. “The employer also guarantees a minimum interest rate that’s typically lower than in a traditional defined-benefit plan. The plan’s future costs are more predictable and thus leads to a reduced risk of underfunding. The employee gets a more portable plan and will accrue benefits more evenly. They may also share in any returns that come in above the return target.” 

Managing Risk

Leonard Gilroy, director of government reform at the Reason Foundation, says reforming public pension plans is all about making better decisions.

“A better system is one that better manages risks for everybody: the taxpayers, the employees, … all around,” Gilroy said. “That can come in a lot of different forms. It could mean ratcheting down your [investment return] assumptions. That’s a very simple way to go, but that means you’re going to pay more.”

Gilroy says small reforms open the door to more significant changes down the road.

“You could then start moving into things like hybrid defined-benefit and defined-contribution plans that start to de-risk the plans and put more into a defined contribution-component,” Gilroy said. “Basically, you pay in and you’re done, from the employer’s perspective.

“The basic answer is you need to start implementing reforms that start to de-risk the plans, and then you need to start to reduce the volatility in the rates that employers … and thereby taxpayers … are paying into these systems,” Gilroy said. “There are a lot of ways to do that.”

Dustin Siggins ([email protected]) writes from Washington, DC.