Retirement Systems official urges caution on retiree COLAs; RSA board to request legislative help for PHIP shortfall

Mia Scott, legislative counsel for the Retirement Systems of Alabama (RSA), briefed the Alabama State Board of Education on the Teachers’ Retirement System (TRS), retiree cost drivers and a shortfall in retiree health funding.

Scott said TRS benefits are funded through member contributions, employer contributions set by statute, and RSA investment earnings, and that retiree COLAs are not a plan feature funded throughout a member’s career. “The retiree COLA was granted, and then the liability for that COLA was just added to RSA’s liabilities,” Scott said, explaining why COLAs are expensive when granted ad hoc.

Scott told the board that TRS paid about $2.5 billion in retiree payroll in fiscal 2023 and that TRS trust assets for benefits are roughly $28 billion. She said investment income was the largest revenue source in fiscal 2023 (about $3.3 billion) and that recent market volatility affects the system’s funded status.

Why it matters: TRS covers K–12 teachers and other education employees statewide; employer contribution rates feed school budgets, and retiree health and pension decisions can create multi‑year obligations for districts and the state.

Key details from the presentation and the board discussion: - Scott said there are roughly 130,000 active TRS members paying in now. Employer contribution rates are set after actuarial valuations and by the legislature. - There is no statutory authority for TRS to grant retiree COLAs; in Alabama they must come from the legislature and historically have been granted ad hoc and often without pre-funding. Scott said a 1% prefunded TRS COLA would cost roughly $200 million in upfront normal‑cost funding. - The RSA board recently addressed an unexpected shortfall in the Public Health Insurance Plan (PHIP) for Medicare-eligible retirees caused by changes in federal Medicare funding for Part D. Scott said the RSA board authorized staff to withdraw up to about $119 million from a retiree trust (established in 2007 and valued at about $2.3 billion) for fiscal 2026 and to request roughly $129 million from the legislature to cover the remainder. - Scott said the TRS employer contribution rate is projected to increase about one percentage point for FY26, driven by lower investment returns recognized in 2022, updated actuarial assumptions (mortality, investment return), and salary growth.

Board members asked for further detail about participant makeup, comparisons with other states' COLA designs and the interplay with other state plans (SEIB/PHIP). Scott and staff said options are limited: retrofitting a statutory, prefunded COLA for the current membership would be “astronomically expensive” and that the legislature has instead used one-time bonuses or supplemental funds in recent years.

The board and staff flagged next steps: school systems should expect employer rate pressures in FY26 budgeting; RSA staff will present more detail to the legislature and the board will return with contingency options if the legislature does not appropriate requested PHIP funds.

Ending: Scott urged board members to view the pension and retiree‑health issues as context for board budget discussions. “I don't know what the solution is that would help retirees that is affordable and sustainable,” she said, adding RSA’s primary legal duty is to protect promised benefits.