Report reaffirms precariousness of pension funds

The good news is the bad news is not as bad as it could be regarding Louisiana’s tremendously underfunded major state pension funds. Regardless, heeding these systems declarations that observers should go home for nothing is to be seen encourages a false sense of security.

The Louisiana Legislative Auditor recently released an actuary report on the financial health of the two largest of the state’s many pension systems, the Louisiana State Employees Retirement System and the Teachers Retirement System of Louisiana. Together, they account for nearly $18 billion of the state unfunded accrued liability that constitutionally must disappear by 2029. The report implied that a corner of sorts was being turned in the battle to meet this goal, arguing that the present systems’ configurations will allow for increasing ability to pay down this gap between what they are expected to owe to retirees and what is scheduled to be made available.

The systems cheered on this result, which has come as a result of several legal changes over the last few years – ironically, some of these strenuously opposed by the systems when others previously recommended these prior to political tides making system opposition untenable. However, left unmentioned were the two biggest factors that have stabilized matters over the past couple of years.

One was something never favored by the systems, reductions in force. During the seven years of Gov. Bobby Jindal’s tenure, overall state employment has gone from a full time equivalent of about 93,000 to around 61,000, a decline of about a third (most state employees are in LASERS but those in higher education are in TRSL). While in the short run this can exacerbate the UAL as fewer employees pay in to offset money going out in retirement pay, years before the due date positive effects will occur as fewer potential retirees and beneficiaries will exist and this will carry forward in perpetuity.

The other has to do with something they have no control over, macroeconomic conditions that affect investment performance. The easy money monetary policy of the federal government has inflated equity values, around which the system’s investments are built, while the economy sputters along in the worst recovery in history and worst jobs picture in nearly four decades due to depressive policies of the Pres. Barack Obama Administration. Hopefully, the economy someday will catch up to portfolios, but if it doesn’t eventually the air will escape the balloon, investment performance will suffer, and as a result the UAL, under control the past few years, will increase significantly.

Compounding this would be that if investment returns decreased, the state panel in charge of actuarial matters would force the systems to lower their expected rates of return. This in turn drives up the annual cost to compensate for the UAL, although if the economy picks up steam later and returns rise as a result, this can provide more money in the future to pay off the UAL increase that happened as a result of the change in rate in the past. Two such downgrades already have happened in the past few years.

That’s one reason to be wary of the systems blowing sunshine up skirts. The other is that, despite the optimistic tone struck by the systems, the report scarily warns that at the present rate of extra taxpayer contributions to pay off the UAL by the target date the chances of succeeding are even money. Considering that just for LASERS and TRSL in fiscal year 2013 taxpayers had to throw in an extra more than $1.5 billion (even though most TRSL members are at the local level, since education performed locally mostly uses state money, state taxpayers also get hit here along with their footing the bill for college employees), or 6 percent of the entire state budget, for that portion of the UAL payoff, anyone who thinks sunny days are ahead on this issue either lives in a fantasy world or shills for the systems.

Already in the aggregate for LASERS employees their agencies last fiscal year had to pay 37.4 percent of the value of their salaries because of the UAL, with over 30 percent of that going to pay it down (the rest is the statutory base payment required of agencies). Obligations to TRSL employees are not much less, in the aggregate being 27.7 percent with over 20 percent of this because of the UAL. Adverse economic performance would drive these rates much higher.

So by no means are taxpayers out of the woods in terms of paying fantastically huge sums over the next 13 years and perhaps in those years to come much higher than now. The systems can try to distract from the fact all they want, but both are around only 60 percent funded, with the clock ticking and their continuing resistance to other reforms such as increasing the employee contribution for jobs which generally are overcompensated in the first place. Rather than reassurance, this report should generate continued concern over the rickety condition of LASERS and TRSL.