What can other pension systems learn from the Retirement Systems of Alabama?
Two researchers from Troy University conducted a case study on the Retirement Systems of Alabama, exploring the factors that led to the system’s under-funding, which may be representative of issues found in other state pension systems.
There are three main components to the case study: the evaluation of the health and performance of the RSA according to its asset growth and actuarial accounting; an analysis of the factors that led to the decline of the health and performance of the system primarily through increased risk exposure; and potential policy options for reform.
The research is too sprawling to be summarized here; read the paper yourself here.
The Retirement Systems of Alabama (RSA) is an appropriate and representative public pension system for a case study on public pensions for three reasons. First, in terms of the RSA’s funded health, as measured by its funded ratio, the RSA ranks in the middle of the pack among the 50 U.S. states (The Pew Charitable Trusts 2015). Second, despite making its annual required contribution each year, the RSA’s funded ratio has fallen in the state rankings from 20th in 2003 to 30th in 2013. This makes it a particularly interesting public pension system to analyze (The Pew Charitable Trusts 2015). Finally, the RSA’s funding status as a percentage of tax revenue ranks it as the 5th worst in the nation (Novy-Marx and Rauh 2009, 198). This means, that, despite ranking in the middle of the pack in terms of funded health, that the RSA will likely require major reforms before many other states.
We argue that the RSA has avoided fundamental reform through the use of misleading and inappropriate accounting and riskier investments. Reforms leading to greater transparency, the curtailment of in-state investments, and, most beneficially, transitioning new public employees to a defined contribution system with individual retirement accounts, is necessary to improve the funded health of the RSA.
As a representative public pension system, these lessons and reforms from our case study on the RSA are generalizable to other state and local public pension systems and can help corroborate and inform future investigations.