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Reduced retiree debt could benefit school construction

By M.J. Ellington · (334) 262-1104

MONTGOMERY — Alabama is getting out of debt for retiree benefits faster than the state’s financial experts thought possible and schools may benefit.

Financial experts expect to earn a lower rate on $1 billion in school construction bonds the state plans to sell in December.

State Finance Director Jim Main said Alabama has reduced the unfunded liability for the state’s portion of retiree costs by $2.1 billion.

The lower debt should help Alabama get a better bond rating. That means the state will sell the bonds at a lower cost to the state. The result should be more money to improve schools.

In the past, states paid for the cost of retiree health care benefits on a pay-as-you-go plan. It did not include trusts or long-term investments to help defray yearly cost.

Three years ago the federal Government Accounting Standards Board adopted new rules requiring states to count year-to-year retiree expenses as liabilities for accounting purposes.

Main said keys in the debt reduction are the two irrevocable trusts voters approved in June. The vote set up the trusts to help pay retiree costs 30 years into the future.

At some point, Main said, the investment income for the two trusts should pay for year-to-year retiree benefit costs.

Retirement Systems of Alabama Chief Executive Officer David Bronner said the Legislature’s endorsement of the trusts and the 30-year-plan was crucial.

“To have 10 percent of it accomplished in six months is quite phenomenal,” Bronner said.

Alabama also adopted health plan cost-containment measures to hold health insurance premium increases. Both state employee and education employee health insurance plans include a monthly surcharge for smokers.

“Alabama has attacked the costs like no other state,” Bronner said. He believes bond raters will look favorably on the state’s cost containment measures for health coverage.

Alabama Education Association Executive Secretary Paul Hubbert said other states are watching what Alabama puts in place to meet the new federal accounting standards.

With the reduction, Alabama dropped the unfunded liability for future education retiree benefits from $14.6 billion to $12.5 billion.

The Public Education Employees Health Insurance Board will allocate part of its earnings to the education retiree trusts. The earnings include revenue from smoker surcharges. The trust fund now has about $417 million.

The State Employees Insurance Board expects to transfer $50 million into the state employees’ retirement trust before the end of December. The liability for retired state employee health benefits is $5 billion, said RSA Deputy Director Marc Reynolds.

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