Pension system faces funding challenges

Published 8:26 pm Thursday, April 28, 2016

By Katherine Green Robertson and Lynn Greer
Robertson is Vice President for the Alabama Policy Institute (API). Greer represents District 2 in the Alabama House of Representatives.

Like many pension funds across the country, the State of Alabama’s public pension

system faces significant funding challenges. Alabama’s pension costs have doubled over the last ten years, despite the fact that the legislature has never missed paying the steadily increasing annual required contribution. In the past, this payment was made with little fanfare, but ongoing budgetary woes have demanded a higher degree of scrutiny.

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Last year, in the face of a $200 million shortfall for the state’s general fund, every program or service was on the chopping block. Alabama’s Republican governor tried to raise over $500 million in new taxes, but vehement opposition from the general public left the proposal dead on arrival. Without new revenue, the Alabama Legislature spent nearly seven months struggling to cut its way to a balanced budget. State parks and driver’s license offices were closed, road projects were threatened, and law enforcement offices braced for layoffs. All the while, Alabama’s public pension system received nearly $1 billion from taxpayers.

While state leaders have begun to pay more attention, Alabama’s taxpayers have not yet come to grips with the high cost of the state’s public pensions.

The haze of misinformation surrounding the debate often obscures the reality: the state has at least a $15 billion funding gap that will not be closed until 2050, at the earliest. Over the next 25 years, the projected amount of the state’s yearly contribution — the cost of paying for new benefits earned and a portion of the existing unfunded liability — as presented on a bar graph looks like a steep staircase, topping out at over $2 billion in 2044. That staircase only leads to full funding by 2050 if the state does not accrue any additional unfunded liabilities between now and then.

To avoid amassing any new debt, the system will have to steadily hit its 8 percent target investment return. If the S&P 500 is any indication — it is down by .48 percent over the last year and up only 4.9 percent over the last ten years — this will be a difficult task.

One thing is certain: pension reform will come to Alabama. Responsible reforms can be adopted now, or the state will be forced to make hasty, draconian changes during the next severe economic downturn.

The involuntary, reactive option will present a much uglier scenario for retirees, taxpayers, and politicians alike.