By David Bronner
The Cullman Times
Dr. Scott Beaulier, a professor at Troy University, has written an editorial criticizing the funding policy and actuarial assumptions made by the Retirement Systems of Alabama (RSA). Citing an article by Andy Kessler, a former hedge fund manager, Beaulier argues that:
The problems Kessler is describing (and relating to California) are ones we face here in Alabama thanks to the Retirement Systems of Alabama. Like CalPERS, the RSA assumes high expected returns of around 8 percent per year, but these returns, according to Kessler, are unlikely any time soon because in our new environment, "inflation is 2 percent, productivity is 2 percent, and given the interest rates are zero, multiple expansion should be...-1 percent."
Dr. Beaulier makes a fundamental and common mistake in his criticism of the RSA assumed rate of return. He looks at only recent market history and current economic conditions to make his dire predictions of pension doom. He is just plain wrong that an 8 percent assumed rate of return is unrealistic. An 8 percent return rate is average for all public pension funds, and the RSA has adopted this assumption at the recommendation of its actuaries. The RSA has the fiduciary responsibility of paying lifetime benefits for its members and the many generations of future members who come after them, so this assumption is of an average return over the long haul -not for only the next 10, 20 or even 30 years.
Don't just take my word for it, though. History shows that RSA returns have met and exceeded these assumptions over time. The average return for RSA's funds for the last 25 years is about 8.2 percent. And although the market went through the worst period of returns in its history during the last 10 years, that trend ended in 2009. In fiscal year 2012, the RSA's returns were over 18 percent. In fact, RSA returns for the more than 3-year period from October 1, 2009, through the end February 2013, have averaged over 10 percent per year, well above RSA's 8 percent benchmark.
Nonetheless, in recognition of the historically bad market conditions, the RSA has worked with the Legislature to help it make changes to our systems to improve its sustainability. The RSA is ever mindful of its legal and moral responsibilities to its members and the public, and continually seeks to improve and strengthen its operations.
I have the perspective of over 40 years' experience as CEO of the RSA. I have seen incredible swings in market conditions, from the astronomical interest rates of the late 1970s and early 1980s to the dot com bust in the late 1990s to the more recent housing crisis. I understand that the RSA must be operated with an understanding of the past and a view towards the horizon, not based on panic arising from short-term and temporary conditions.