The Retirement Systems of Alabama (RSA) provided a startup loan to its current actuary in 2005. One Alabama economist says this conflict of interest allows the public pension to appear more stable than it is to lawmakers.

Last month, 1819 News obtained audio footage of RSA's former general counsel Leura G. Canary in 2015 admitting the pension gave a startup loan to Cavanaguh Macdonald Consulting, LLC, who is currently the RSA's actuary.

1819 News then contacted the RSA's deputy director for administration Jo Moore, who confirmed the information and explained that Cavanaugh Macdonald paid off the $2 million loan in full in February 2013. 

Moore also explained that Cavanaugh Macdonald provides consulting services nationwide to approximately 65 other public pension clients. 

Nevertheless, Dan Smith, director of the Political Economy Research Institute and professor of economics at the Jones College of Business at Middle Tennessee State, thinks the RSA providing a loan to its actuary is a "major conflict of interest."

"The public and legislatures themselves depend upon the actuary reviewing the RSA's assumptions and financial statements to ensure that they are accurate and that they're making realistic assumptions, so it is a major conflict of interest when the actuary has received a loan from the RSA and thus is incentivized or prone to take a stance that is favorable to the RSA," Smith said.

Smith is a former faculty member of Troy University, which he said he left due to backlash from activists and administrators for his research which shed critical light on the RSA and its CEO David Bronner, Alabama's highest-paid state employee who has been at the RSA for half a century.

Smith said his research found that the RSA makes less realistic assumptions than other public pension systems, even though most public pensions already make "unrealistic assumptions."

"All public pension systems are guilty of making unrealistic assumptions. The RSA is making some of the most egregious violations," Smith said. 

Smith accused the RSA of using an unreasonable rate of return to overstate its assets compared to its liabilities. He said this safeguards its reputation among lawmakers in Montgomery, who may interfere if they began to question the RSA's activities.

An assumed rate of return is a pension plan's estimation of how it will perform.

Public pension systems like the RSA calculate an assumed rate of return for each of its plans, such as the Employee Retirement System (ERS) and Teacher Retirement System (TRS), by considering several factors, inducing past performance. However, assumed rates of return are not historical averages.

Actuaries employed by pension systems, such as Cavanaugh Macdonald, use investment return assumptions to determine how much benefit funding is expected to come from what the pension system earns from its investments compared and how much employers will need to contribute. The higher an assumed rate of return is, the fewer contributions will be required from the state and its employees.

The assumed rate differs from the actual rate of return, which is calculated at the end of the fiscal year according to how well the pension plan's investments performed.

"Given that the RSA is making unrealistic return assumptions that fundamentally affect their financial structure if they fail to meet … its assumed rate of return, then it will either have to cut benefits to retirees [or] raise state taxes to pay for it," Smith added.

According to the National Association of State Retirement Administrators (NARSA), the ERS and TRS have some of the highest assumed rates of return in the nation at 7.45%. Meanwhile, the ERS and TRS's 10-year, five-year, three-year and one-year annualized returns are below their assumed rate. Both the ERS and TRS even experienced losses exceeding 13% in FY 2022.

"What this means is that they're not putting enough money in each year," Smith said.

He suggested that the RSA might not want to place too much of a financial burden on legislators because it doesn't want lawmakers to explore alternative options for state employees, such as individual retirement accounts. 

On the other hand, Moore stated that the RSA selected its actuary properly through a request for proposal (RFP) process.

"RSA's actuary is selected pursuant to the [RFP] process," Moore explained. "Notably, the RSA actuary's experience study as well as the initial valuation after the experience study are peer reviewed by two other actuarial firms who are also selected by RSA using the RFP process. Thus, Cavanaugh Macdonald Consulting's experience studies and valuations have been and are subject to such peer review and the peer reviews have validated and concurred with the conclusions and recommendations of Cavanaugh Macdonald Consulting."

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