Changes on horizon for state retirement systems

It’s no secret that America is getting older.

Americans are living longer, and employers are dealing with more retirements than ever before.

According to the U.S. Census Bureau, the ratio of employees to retirees nationwide was at 2.9 to one in 2010, the lowest in history, and is projected to dip to 1.9 by 2030.

For the State of Alabama, that’s become a problem.

The state paid $967 million combined last year into the Teachers’ Retirement System and the Employees’ Retirement System, according to figures provided by the Retirement Systems of Alabama.

The stock market’s troubles in recent years have hit the retirement system hard, as the system’s diversified investments haven’t paid off as projected.

An RSA report done last year by Cavanaugh Macdonald Consulting said the total accrued liability of the system will reach almost $70 billion after 30 years under the current structure.

“For the last 10 years the returns have been basically negative,” said Leura Canary, general counsel for the RSA. “2008-2009 was the low point for stock market returns over a 10-year period in the history of the stock market. The reality is the demographics have changed substantially. In addition to this difficult market, we have a population that is aging, life expectancies are longer and the ratio of current employees to retirees is dropping.”

Blame for the problems is spread around, depending on the source.

Some state legislators say the RSA is at least partly responsible for the state’s increased financial burden.

“It’s a serious problem,” said Rep. Paul Lee, R-Dothan. “This past year the state put in $967 million on top of our match this year. We don’t have anymore money. Has (RSA) not been productive because of bad investments or the economy? I think it’s a little of both.”

For its part, RSA maintains the declining economy has affected retirement systems across the country, and the current issues were unavoidable.

“We’re actually in good health relative to the economy and what’s been going on throughout country,” Canary said. “The percentage of employer contributions has remained relatively stable since 1980. The returns have not been as high as they historically have been in the market, but that’s because of the market. It’s not underperformance by RSA, it’s a deeply problematic market. This is a problem in every state, not just Alabama.”

RSA Director of Employee Benefits Bill Kelley said some of the concerns about the system are overblown.

“There are some studies that are very flawed where people say the pension funds will run out of money in the future,” Kelley said. “If you just decided you’re going to quit work today and live on it until it runs out, yeah, you’re probably going to run out some day. Even that’s assuming no returns.”

Most experts, including RSA representatives, agree changes are necessary to the system.

Last year, the state increased most employees’ contribution rates from 5 percent to 7.25 percent, a number that will jump to 7.5 percent starting Oct. 1.

Under the current rules, a state employee needs only to work for 25 years or reach age 60 with at least 10 years of work to qualify for retirement.

Retirement payments are calculated using the years of service, a benefit multiplier of 2.0125 percent and the average salary during the employee’s last three years of service.

While no bills have been introduced yet during the current legislative session, Lee said it’s just a matter of time.

“Yes, there will be changes,” he said. “I expect proposals of changes to come soon. There are several (ideas) out there. It’s not a matter of what we want to do, it’s a matter of what we’ve got to do to help pay for it. (Future hires) will be paying for those that are in the middle of their career working today, just like those working today pay for those who worked in the past. New hires will probably end up working a little longer with a larger percentage of their match.”

Most counties and municipalities, including Dothan and Houston County, are tied into the state retirement system.

“We’re paying close attention to this for several reasons,” said Houston County Commission Chairman Mark Culver. “I do think something is going to have to be done, because they’ve got to lower the cost to the state. Right now you can retire at any age after 25 years of service, and I don’t know of any other organization that does that. There is usually a minimum age. Let’s assume someone starts working for the state at age 18. That means at 43 they can start drawing their retirement, theoretically. It’s extremely expensive to fund that type of system.”

Canary acknowledged the benefits some policy alterations could ultimately have on the system’s health.

“There are 41 states that have already enacted significant changes to their pensions,” she said. “It wouldn’t be surprising to me and wouldn’t be a bad thing if Alabama tweaked (its) pension system as well. We have people retiring at 45 or 50 and receiving benefits for longer than they ever were. It’s a situation where we were subsidizing someone’s second career. We shouldn’t be paying a 45-year-old who leaves to go teach in another state. It should be for retirement. They still would have that benefit, but they would have to wait until they were older (if changes are made).”

Cavanaugh Macdonald’s study presented several possible changes to the benefits formula, including reducing the benefit multiplier, extending the length of time analyzed for the employee’s final average salary from three to 10 years and instituting minimum age limits from 60 to 65.

Other proposed changes in the study include a “rule of 85” that would require age and years of service to combine to equal at least 85.

“The (discussed change) I think is probably the most significant and reasonable is pushing the age at which someone can draw benefits out later so we are not paying a benefit for as long a period of time,” Kelley said. “The retirement system should be for someone’s actual retirement, when they reach old age and are unable to work.”

Everyone seems to agree that current employees’ benefit packages will remain unchanged by any legislation.

“I expect a proposal that will affect only new hires. With Paul Lee in office, (state employees) won’t lose their benefits,” Lee said. “Those people that were hired and signed their name to work so many years, I think we should stand by what we said. I don’t think it’s fair to change the rules for those who have been working two or three years or 22 or 23 years in the middle of employment. If you know the rules when you’re hired, OK, but don’t change them in the middle of the game.”

Culver said that’s the biggest concern he has about potential legislation.

“We would absolutely be against any changes to current employees,” Culver said. “Our employees were hired based on a certain pay and with certain benefits, and we feel that’s our obligation to them. We have no problem with new hires being hired under new guidelines, but we would be against changing any benefits to existing employees.”

Kelley said talk of pension changes has caused a statewide panic, but he believes current employees have nothing to fear.

“We’ve had a lot of scared employees,” he said. “In the Huntsville area we’ve had an unusually high amount of retirement applications that are being withdrawn. People are scared the Legislature will come in and change something so quickly that they won’t have time to react. We do not have any reason to believe that’s the case. The Legislature and the governor seem on board to make sure people get what’s promised to them.”

If changes are proposed in the House and Senate, though, they may meet some debate and opposition.

“I disagreed last year with some of the changes that were made, but I think those changes are going to be sufficient to what we need,” said Rep. Dexter Grimsley, D-Abbeville. “We don’t need to go any further, in my opinion. I’d be open for debate on new hires, although I wouldn’t want to do anything to discourage people from going into jobs like teaching. We could create a situation where kids coming out of high school decide teaching is not a career to go into because our state makes the teaching profession unattractive. One of the attractive parts is the retirement system.”

Indeed, some of the proposed changes have caused worry about the state’s ability to recruit high-level employees.

“I do hear from a lot of groups saying they rely on the benefit package for recruitment for certain jobs, police and fire groups,” Kelley said. “While their salaries are not that high, they look at the overall benefit package, and that’s how they get some young folks to come in and do those jobs. It’s certainly not because of a super-high rate of pay. If the retirement benefits are not very meaningful, then those guys are concerned about their groups.”

Proponents of change, however, say the workforce quality will remain unchanged.

“I don’t expect a (quality decrease) to happen because the present system we’re under is much better than a private system,” Lee said. “The pay has increased and is somewhat comparable to those that are in the private sector. The key to changing it is that people understand what they’re getting into from day one.”

Sen. Billy Beasley, D-Clayton, said any proposed changes will require intense study before he voices his approval.

“A study needs to be made for new hires,” Beasley said. “A lot of people that have been in the public sector have not entered the public sector based on income, but the benefits package has been an attractive part. We don’t need to do anything to discourage people from entering the public sector at the local level, county level or state level.”

According to RSA, 16 states have increased age and vesting limits in the last two years.