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Alabama NewsAlabama Politics
Alabama Retirement System is at 'Code Orange'
By Gary Palmer
Posted on: September 19, 2007
The threat level in Alabama is “code orange,” at least according to tracking done by the AFL-CIO.
The AFL-CIO maintains a color-coded map on its Office of Investment website which was last updated on June 27, 2007. The map shows the fiscal health of each state’s employee pension plan; code orange indicates there is a significant threat to state and education employee retirement benefits.
How Alabama warranted code orange status should interest every taxpayer and voter in the state. Since 2000, the ratio of the value of assets to liabilities of the Retirement Systems of Alabama (RSA) has been in decline. In layman’s terms, the total value of the RSA’s assets is well below the amount owed to members of the retirement system. According to a September 9, 2007 Birmingham News article, the RSA currently has only enough assets to cover about 82 percent of what is owed to active and retired state and education employees. This amounts to an unfunded liability of over $2 billion.
The loss of asset value is partly due to the recession from 2000 to 2003, but it is also the result of loose fiscal policy on the part of the state Legislature.
In the July 2007 RSA newsletter, CEO David Bronner reported that from 2000 to 2006, the Alabama State Legislature voted for Cost Of Living Adjustments (COLA) that will cost the state over $3.2 billion, when paid over 20 years. The seven percent COLA increase granted in 2006 alone increased the RSA’s unfunded liabilities by about $850 million.
In addition to COLAs, the state Legislature passed a series of pay raises for state and education employees which also increased the retirement system’s pension costs. As a result of the Legislature’s actions, Bronner says that the RSA will need the Legislature to appropriate $70 million to meet its obligations for the 2008-09 fiscal year.
The ability to meet these obligations will become more difficult in the coming years. While pension costs are rising, the ratio of active state employees paying into the system relative to the number of retirees is declining. Since 1985, the number of education and state retirees has almost tripled and the number will double again in the next ten years. According to Bronner, there are currently about 80,000 retirees. But because of earlier retirements and longer life spans, in ten years the number of retirees will rise to 160,000 while the number of active state employees will remain at current levels of about 187,000.
Unfortunately, there is more bad news.
Alabama is also in trouble with its health benefits plan. It is estimated that within the next two years the annual cost for health benefit premiums for active and retired state and education employees will top $1 billion. Let me restate that, within two years, the Legislature will have to come up with over $1 billion per year just to pay the premiums of state and education employee and retiree health benefits.
If you wonder how Alabama taxpayers could be facing such enormous unfunded liabilities, it may help to put the number of government employees in the context of the state’s workforce. According to the July 2007 report from the Bureau of Labor Statistics, there were 2,107,500 people employed in Alabama and of those, 377,200 are government employees. In other words, one in every six people who have a job in Alabama work for the government.
Based on Bronner’s report, there are 187,000 state and education employees which means one in every 11.3 people with a job in Alabama work for the state. And if you look at the entire state adult population over the age of 18, one in every 13 adults in Alabama is either a current state or education employee or is a retired state or education employee.
These stats are very important to the issue of allowing active and retired state and education employees to serve in the state Legislature. Alabama taxpayers are being victimized by the largesse these politicians have created.
Huge unfunded liabilities are not something that suddenly crept up on the state. This has been building for years. Alabama, like other state governments, operates the state’s health and pension benefits plans on a pay-as-you-go basis. Consequently, the state Legislature has only set aside enough money in each annual budget to cover the costs of the pension and health benefits for each budget year even though this practice created billions of dollars in unfunded liabilities.
Unlike the federally protected pension plans of private sector companies, the 2006 federal pension protection legislation does not cover state employee pension plans. This means that if push comes to shove in order to pay state and education retiree health and pension benefits, it will most likely be Alabama taxpayers that the state Legislature will attempt to push and shove.
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