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RSA official: prefunding retiree COLAs would be costly; last retiree COLA granted in 2007
Summary
Nia Scott of RSA presented state retirement system data to the committee, saying retiree cost‑of‑living adjustments (COLAs) were last granted in 2007, unfunded COLAs added an estimated $2.2 billion in liability, and a 1% prefunded COLA would require roughly $236 million up front.
Nia Scott, representing the Retirement Systems of Alabama (RSA), briefed the Ways and Means Education Committee on the Teachers’ Retirement System (TRS) funded ratio, prior retiree COLAs and the fiscal implications of grantable retiree adjustments.
Scott said the TRS funded ratio fell from 70% to 67% in the fiscal‑year‑2022 valuation in part because of pay raises and salary‑matrix changes recognized in the valuation and market and actuarial changes. She said the legislature last granted retiree COLAs in February 2007 and that four retiree COLAs granted earlier were added to the system’s liability without being prefunded; actuaries estimate those unfunded COLAs added about $2.2 billion to TRS’s unfunded liability.
Scott told the committee that, for TRS, prefunding a 1% COLA would require an approximate one‑time payment of $236 million to avoid adding liability; she said a one‑time bonus equal to $1 per month of service would cost about $31.6 million. Scott and committee members stressed the difference between ad hoc, unfunded retiree COLAs (which increase liabilities) and funded approaches that require up‑front payments or higher employer contribution rates.
Committee members asked questions about plan design and sustainability. Representative Faulkner and Representative Baker emphasized that TRS is a defined‑benefit plan and that retiree COLAs historically were not baked into the normal employer contribution rate, so adding recurring COLAs without prefunding would increase the system’s liabilities and affect the budget. Scott noted retiree health‑care costs are rising and gave an example that Medicare‑eligible retiree costs for RSA were estimated to increase from about $57 million in FY24 to an estimated $250 million in FY25, a development the governor’s budget addressed in part.
Scott said RSA has paid roughly $7.5 billion in COLA payments (cumulative) dating back to 1979, and $176 million in one‑time retiree bonuses since 2008. Committee members asked staff and RSA representatives about mechanisms to make COLAs recurring without creating unfunded liabilities; Scott said some legislative proposals would provide appropriation mechanisms but would still require funding decisions to avoid increasing long‑term unfunded liability.
The committee discussed policy tradeoffs — prefunding a COLA versus providing a one‑time bonus — and the fiscal stress that large recurring COLAs would impose on the ETF and other state budgets. The transcript records questions and discussion but no committee action on COLAs in this session.
