Scott Beaulier, Cameron Smith: Smoke, mirrors and the RSA

  Most Alabamians know that The Retirement Systems of Alabama (RSA) manages Alabama’s state pension funds. But recently the RSA commissioned a study by Dr. M. Keivan Deravi of Auburn University Montgomery to demonstrate the impact of RSA’s investments in Alabama, particularly the “alternative investments” ranging from golf courses to media outlets.

  According to Dr. Deravi, the RSA has invested an inflation-adjusted $5.6 billion in Alabama’s economy from 1990-2011, and RSA investments in Alabama produced $1.1 billion of additional tax revenue to the State of Alabama over the same time period. Dr. Deravi contrasts the tax revenues on Alabama investments with the $542 million the RSA would have likely earned on $5.6 billion in bond and equity investments.

  Unfortunately the comparison is misleading. While the $1.1 billion in additional tax revenue benefits the state budget, it should be compared to what the RSA’s investment decisions and overall economic performance has cost state budgets. Since 2003, the State of Alabama’s has paid almost $2 billion just to offset RSA’s unfunded liabilities. That amount is in addition to the billions the state pays through regular payroll contributions. In only eight years, shoring up RSA’s pension accounts has cost the state almost twice as much as Dr. Deravi’s estimated tax benefit over the last twenty two years. Investing in equities and bonds rather than projects to increase state tax revenue, would have resulted in income to reduce the unfunded liability Alabama’s citizens are required to offset.

  RSA’s website states, “We are the safekeepers of the pensions for thousands of Alabamians and we take our job seriously.” While investments in Alabama are certainly appreciated, they have little to do with “safekeeping” Alabama’s pensions by creating financial solvency for a broken retirement system, which is no longer sustainable in its current form.

  The RSA’s choice to invest in programs with a high “social benefit” and the potential to increase tax dollars to Alabama’s budget extends RSA’s mission beyond its critical purpose: maximizing the value of pension contributions and delivering promised benefits to members. And, given recent increases in state funding to cover RSA’s unfunded liabilities, should the RSA really engage in economic development and tourism support? Rather than focus on total returns on investments over the past 10 and 20 year periods, RSA has asked Dr. Deravi to explore other potential benefits created by RSA’s existence. And when any organization spends billions of dollars, those results are not hard to find.

  The RSA’s report by Dr. Deravi is calculated protection against continued reform of Alabama’s state pension policies. At a time of high unemployment and a struggling economy, RSA is claiming Alabama must have RSA’s “alternative” investments. But RSA’s study provides Alabamians with only one side of the ledger. With employees living longer, a track record of poor investment performance, and a system out of step with the retirement options afforded to the average Alabamian, the economic benefits of RSA’s Alabama investments must be weighed against the economic strain created by the pension guarantees.

  In a recently released study not funded by RSA, the Alabama Policy Institute makes the case for Alabama to move towards a defined contribution retirement system or a hybrid system like the Federal Employees Retirement System. If spend-happy politicians in Washington recognized over 25 years ago that a traditional defined benefit pension was not affordable, it is time Alabama consider other options too.

  About the authors: Scott Beaulier is Executive Director of the Manuel H. Johnson Center for Political Economy at Troy University and Cameron Smith is Policy Director and General Counsel for the Alabama Policy Institute.

  This article was published by the Alabama Policy Institute.