Alabama Legislature bill to examine cutting pension benefits for new hires

MONTGOMERY, Alabama - Top-ranking state lawmakers said they want the Legislature early next year to debate plans to reduce pension benefits for newly hired teachers and other public employees, plans that could save the state billions of dollars in coming decades.

"I think everything has to be on the table," said Speaker Mike Hubbard, R-Auburn, leader of the state House of Representatives.

Hubbard said he and Sen. Del Marsh, R-Anniston, the top-ranking state senator, several months ago asked Retirement Systems of Alabama chief executive David Bronner to provide options for reducing future state pension costs. Bronner delivered a report a few weeks ago.

Hubbard and Marsh said any new pension plans that reduced benefits and cut the state's costs would apply only to new hires at state agencies and public schools, two-year colleges and universities.

"We can't change the rules in the middle of the game for people," Hubbard said. "But this is a long-term problem that we have to start solving now. If we don't, it's just going to exacerbate itself and just be a colossal train wreck."

Alabama's state government in the 2011 fiscal year, which ended Sept. 30, paid a total of $963 million to the state's teachers' and employees retirement systems to help keep them financially healthy. That was an increase of $449.2 million, 87 percent, in five years.

Marsh said he expects to sponsor or push for some revision of the pension coverage for new hires next year, "to reduce the amount that the taxpayers are having to put into this system to make it whole."

Marsh noted that most employees of public schools and state agencies now can retire and start collecting a state pension at any age as long as they've worked at least 25 years. Marsh said he thinks the ability to retire at any age should require at least 30 years of experience for new hires.

That option wasn't one of the ones listed in the report Bronner delivered. It did list options such as requiring public retirees to turn 60 or 65 before they could start collecting a life-long pension.

The report estimated that requiring people to be 65 before collecting a state pension could save the state as much as $6.9 billion over a 30-year period starting in fiscal 2013. It also said switching to that option could reduce the state's projected liability in future pension payments after the 2042 fiscal year by as much as $16.4 billion.

Hubbard noted that state government in fiscal 2011, besides paying a total of $963 million to the state Teachers' Retirement System and Employees' Retirement System to help keep them financially healthy, also paid $11 million into to the related Judicial Retirement Fund.

"That's $1 billion we didn't spend on education, on corrections, on public safety, on infrastructure," to instead "prop up the benefits plan," Hubbard said.

The combined state contribution to the TRS and ERS is forecast to drop this year because lawmakers in the spring ended a costly deferred retirement option and passed a law to make employees of state agencies, public schools and colleges pay more for pension coverage.

Most contributed 5 percent of their paychecks for pension coverage until Oct. 1, when the contribution rate jumped to 7.25 percent of their paychecks. It's scheduled to rise to 7.5 percent in October 2012. The combined state payment to the TRS and ERS, after falling to an estimated $776 million this fiscal year, is forecast to rise to about $873 million in fiscal 2013, and the report delivered by Bronner projects the cost to keep rising for many years.

'Leave it alone'

Paul Hubbert, executive secretary of the Alabama Education Association teachers' lobby, said he opposed changing pension benefits for new hires.

"The more we keep cutting those benefits, the less attractive teaching becomes. We're not overrun with people now trying to clamor to get into the profession," said Hubbert, who chairs the 14-member board that oversees the Teachers' Retirement System.

"I think we've got a good system," Hubbert said. "I think we need to leave it alone."

The teachers' and employees' retirement systems on Sept. 30, 2010, covered 292,365 employees and retirees or other former employees of state agencies and public schools, colleges and universities or related groups.

The report on possible pension plan changes for new hires that Bronner delivered was written by RSA's actuary firm, Cavanaugh Macdonald Consulting in Kennesaw, Ga.

The study makes assumptions about payroll growth and investment returns over three decades. For instance, it assumes that investments built up over the years to help pay future pension benefits will have annual returns of 7.5 percent.

The report did not mention possibly ending defined-benefit pensions for new hires and instead giving them something like 401(k) plans. An employer and employee can contribute money into a 401(k) and the employee can later spend the money plus any investment gains, but a 401(k) provides no guaranteed benefit upon retirement.

The report proposes keeping for new hires the framework of the current defined-benefit pension systems for public employees and retirees, which provide guaranteed pension benefits based on a person's years of service and salary during final years of employment.

Under the TRS and ERS, a public employee can retire with a pension after 25 years' service at any age, or at age 60 after 10 years of work.

For most people, the guaranteed annual pension benefit under the TRS and ERS equals the number of years the person worked multiplied by a benefit multiplier of 2.0125 percent and then multiplied by the person's average earnings over the last three years of employment.

All the options explored in the report reduced the benefit multiplier to 1.5 percent for new hires. Also, their pension contribution would drop to 5 percent of their pay.

The report also looked at the effects of multiplying years of service and the benefit multiplier by the final average earnings over three years, five years and 10 years. Since salaries tend to be higher nearer retirement, pension benefits tend to drop if final average pay is figured over 10 years or five years instead of three years.

Finally, the report looked at postponing pension benefits. Now, someone who starts work for the state at 18 can retire at 43 with a life-long pension.

The report looked at making a person wait until age 65 or age 60 before being able to collect a pension, no matter how many years' experience he or she had on the job, as long as it was at least 10 years.

It also looked at making a person wait either until his or her age and years of work equaled 80 or 85, or until he or she turned 65 with at least 10 years' experience, before collecting a pension.

The listed option that would save the state the most money would require that someone be at least 65, no matter how many years he or she worked, before getting a pension. The option also would base the annual benefit on average earnings over the last 10 years of work.

If the state switched to such a system for public employees hired on or after Oct. 1, 2012, Cavanaugh Macdonald estimated the state's projected liability in future pension payments after the 2042 fiscal year would total $52.4 billion for the TRS and ERS.

That would be $16.4 billion less than the combined liability of $68.8 billion after 2042 under the current system, a reduction of 24 percent.

Stocks and other assets held by the TRS and ERS could be tapped to pay those obligations, along with future payments by the state and by public employees into those systems. The value of existing and projected TRS and ERS assets totaled $25.1 billion on Sept. 30, 2010, according to Cavanaugh Macdonald.

Savings

Trimmed pension plans for new hires also would let the state pay less to the TRS and ERS to ensure their financial health.

Estimated savings from fiscal 2013 through fiscal 2042 would total $6.9 billion, a reduction of 11 percent compared to what the state would pay over that 30-year period under the current system, under the option that no one younger than 65 could get a pension and the final 10 years' average earnings would be used to compute benefits, according to a Birmingham News review of the report.

Hubbert, referring to the report, said, "This is just throwing out a buffet."

But Mac McArthur, executive director of the Alabama State Employees Association, said he thinks state leaders must look at ways to reduce the state's pension costs, to help make sure the pension systems are "sustainable" and will be there decades from now to pay promised benefits to retirees.