Even dramatic changes won't stop UAL bomb explosion
Another day, another discouraging reminder of the obvious: a report highlighting the precarious state of a Louisiana pension system, in this case the state’s largest Teachers Retirement System of Louisiana. And while it’s never too often to be told that TRSL has astronomically-high unfunded accrued liabilities – at the recent $10.8 billion this will cost every Louisiana resident nearly $2,400 and that mark makes the entirely unrealistic assumption that the UAL will go no higher – it’s another matter whether the state will do anything meaningful about this very soon, if ever.
This is coming straight at Louisianans, including teacher retirees. Which is why probably a lot of them will flee the state so they won’t have to suffer reduced services (their pensions are state tax-free, by the way) to pay for all of this, and have everybody else left pay extra for their golden years.
That Louisiana ranks 11th worst-funded in dollar terms, 11th worst in per capita terms, and fifth worst in funded ratio, and that given the constitutional imperative that the unfunded status of this and all statewide systems must end by 2029 it means – again, making the entirely unrealistic assumption that the UAL will go no higher – an average annual cost of $636 million extra to the state, you would think there might be some policy-maker urgency to address the conditions creating over half of the state’s entire UAL, if not all of it.
Think again. Last year, exactly nothing was done about this except for the relatively small portion of TRSL that constitutes coverage of university instructors, where beginning July 1 new hires go into a cash balance program (already some higher education employees can participate in a related defined contribution program). This only prevents future hires from adding to the UAL and does not address the current crisis.
And this small change is being fought tooth-and-nail by the usual suspects part of or allied with the educrat empire in a series of rearguard lawsuits. Any change is something the systems like TRSL resist because it reduces the amount of money coming into them. To bureaucrats, money means power, their lifeblood, and they will not cooperate in draining it.
Last year, the broader coverage of elementary and secondary teachers did not have any reforms addressed to it because reform also was on the menu for pedagogical aspects of their jobs, and reformers did not want to have too many changes going on at once. But the tremendous resistance to reform – when you add up the number of warm bodies on the state payroll and on local governments’ like those covered under TRSL it approaches 150,000, and some of their family members vote, too – given the large constituency out there, the UAL problem almost has assumed third-rail-of-politics status. The rearguard actions, while likely ultimately futile, still serve to discourage further the boldness needed to tackle the issue.
As previously noted, state Sen. Elbert Guillory has made known his intent to file legislation to tackle the UAL problem in part, and this time it includes TRSL. A change to reduce the final defined benefit computation to a five-year rather than three-year average probably would only marginally reduce forecasted outlays – and would be fought vigorously by special interests if this past year’s attempt to do the same indicates anything. Increasing the contribution rate three percent and pledging roughly three-quarters of that to decreasing the UAL, but, given the roughly 48,500 teachers active in the system who make about $49,000 a year, and the roughly 13,000 university faculty members who average about $55,000 a year in salary (these latter are rough estimates given the data and include the small fraction in the defined contribution program called the Optional Retirement Program) this would funnel only about $69 million annually – or hardly more than one-tenth of the necessary amount – towards funding the TRSL UAL.
Granted, the money will be invested and grow to help offset – but not at the unrealistically-high rate of 8.25 percent assumed for the past decade that overstates actuarial rate of return performance of TRSL by about 500 basis points. What’s TRSL’s bold solution to this? A spokeswoman said it would try to reduce the rate to 8 percent, following the state’s other large pension system the Louisiana State Employees Retirement System earlier this year, that would require the state to add another $40 million or so to the tab.
For one thing, you don’t have to “try” to reduce the rate – a system just tells the state’s Public Retirement Systems’ Actuarial Committee it thinks the lower rate is more realistic, and it’ll authorize it. For another, this does nothing to solve the problem that massive transfers of state resources – now for all systems over $1 billion a year where the TRSL difference represents almost three percent of the entire annual state operating budget – will be needed to close the gap; it just speeds it up a little reducing slightly the overall amount needed.
The fact is, even with Guillory’s reforms and rate reduction, and assuming legislation is passed to put all new TRSL hires into a defined contribution plan, even if the investment advisers of TRSL bring in spectacular returns for the next 17 years, taxpayers are going to have to cough up a few hundred million extra each of those years to fulfill extravagant promises made that teachers, and other state employees, have gotten on the cheap. And there’s no talk of trying to raise the retirement age from its typical for teachers 82.5 percent of final three-year average salary at 55 or 100 percent at 62 to what the real world asks normally, 67 (and not likely at even the lower of these two levels in annuity compensation), which would make a more significant dent but still not close the gap entirely. And if we don’t assume actuarial rates of return well above average, there’s no chance of coming close to eliminating the gap without extra taxpayer support even with all of these reforms in place.
Posted by Jeff Sadow at 11:00