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13.9.12

Pension system tries to distract from needed reforms


As policy ideas about Baton Rouge continue to circulate that would reduce the amount of money coming into Louisiana’s two dominant retirement funds by assets, each tries to crow about its performance when anything beyond surface analysis reveals their warts. First it was the Louisiana State Employees Retirement System which tried to mask its subpar performance over the past decade and more; now it’s the Teachers Retirement System of Louisiana.

TRSL sent out a news release with the latest results from a research firm comparing its performance to other state pension funds, and to a smaller subgroup of those with similar asset amounts. Over the five-year period ending in 2011, TRSL returned 10.7 percent and 2.6 percent in private equity and real assets, respectively. The U.S. average was 7.4 percent for private equity and 1.8 percent for real assets. The release did not give such statistics for the peer group; unfortunately, the report is not publicly available, so TRSL’s place among its peers cannot be determined, but it seems that positive news in that category would have been reported in the release.

But, as with an analysis of LASERS, this kind of relative comparison means little without looking at absolute performance metrics. One of these is to compare the return on investments of the fund. At the end of fiscal year 2011, it held about 60 percent in equities, about 15 percent in bonds, and the remainder in “alternative investments,” which appear to be real estate and commodities among other things. Reviewing return for the past five years reported (that is, performance for FY 2007 through 2011), which includes more than just the categories cited in the release, the average annual return for it was 3.074 percent, compared to the Standard and Poor’s 500 Index (which is based on equities) return of a 4.143 percent. In other words, the fund would have done better by plowing everything into an index fund representing the S&P 500.

Another metric to review is against the 8.25 percent target set by the state (recently lowered a quarter point for LASERS for reasons that will be made obvious below). This is important because the higher the target, the less is assumed that employees and taxpayers must contribute into the system. If the target is not met, taxpayers must make up the difference unless the employees’ rates are raised (which they have not been for many years, and measures to do so were defeated this past legislative session). The average rate of return is over 500 basis points below that.

This affects the third metric, the size of the unfunded accrued liability the state owes to pay off forecast pension obligations. It is calculated by how much the returns miss the target minus contributions computed by a formula designed to pay off the UAL by 2029, which is an additional taxpayer contribution beyond how the system was designed that now is about $1 billion a year extra that otherwise could go to funding health care, higher education, or anything else. At the beginning of this period, the portion of it due to TRSL was $6 billion, meaning it was 71.3 percent funded. At its end, its UAL had ballooned to $10.8 billion (over half of the state’s total) or 55.1 percent funded. Given the performance gap, it’s no accident that the UAL rose 80 percent in this time period.

So when digging deeper like this, the story pretty much is the same for TRSL as it is for practically all Louisiana pension funds run at the state level – underperformance compared to not just the wider world but also and especially against the idealized standard. Both causes will cost taxpayers billions of dollars more because of extravagant promises made to public sector retirees where the unwarranted bragging of TRSL, LASERS, and others distracts from the necessary public policy solutions, such as by having employees pay their fair share for their gravy train of benefits and moving away from a defined benefit to a defined contribution system that would reduce money inflows to these funds. Informed citizens should not be fooled by this braggadocio into discounting these reforms.

3 comments:

Anonymous said...

Once again, you state just enough facts to show your disdain for the retirement systems. Why such disdain? Also, you state that the state's obligation of paying off the UAL is diverting money from health care and higher education. Are you not in support of the move to privatize certain functions of the state funded health care, also known as the health science centers? The UAL is still comprised partly of money the state failed to pay at the time it was due. That has interest added to it.

As for members paying more in contributions towards their retirement, it should be across the board. The proposed legislation this year targeted a small sector of public employees. All public employees are paid through collection of taxes. Therefore, all public employees should be required to pay more in contributions. That includes any elected official or appointee whose position of employment requires membership in a state retirement system.

As for a "gravy train of benefits", I find it remarkable that you believe state retirees live the high life. Recent reports show that there are retirees who live below the poverty level. If you check the poverty level, you will see that this means they receive approximately $15,000 a year in benefits. How is that a gravy train?

If people are moved to a defined contribution system, then the state should also pay into Social Security for those employees. After all, the economic boom of the 80s is no longer in effect. Businesses are closing; people are being laid off. 401k plans are not providing enough for people to live in retirement. So if a person has a defined contribution plan that does not provide enough and no Social Security income, where do they get the money to subsidize their income? By getting a job? That is if there are job openings. Or maybe, they begin to receive food stamps. Oh wait, that is taxpayer money. How is one to survive on what you propose?

Anonymous said...

If the state employees had not retired at 50 or 55, perhaps they would not be living below poverty. Consider if they worked longer as those in the private sector who typically retire at 65 or 67. Those (retired into poverty) who the retirement systems seem so conveniently compassionate for are the very ones who were poorly advised by these same retirement systems. These early and low retirement incomes were very poor individual decisions, yet were the choices made by the retirees. Don't blame the state.

Anonymous said...

Retirement systems' staff are not allowed to give advice. They are not certified financial planners. So your argument that the retired in poverty were poorly advised by these same retirement systems argument does not hold water.

And to say don't blame the state does not hold water either. The retirement systems' provisions are dictated by revised statutes...laws passed by the legislature and signed by a governor. The same group that assigns the budget. Therefore, who else is there to blame?