That’s when the conditions of Art. X, Sec. 29 of
the Constitution come into play, which mean that the 13 state and statewide
retirement systems must not be actuarially under-funded – that is, the systems
each must have enough money on hand to pay for all forecast retirement benefits
of their present members and retirees – by an amount generated prior to fiscal
year 1989. At present, in the aggregate these have only about 60 percent of
that money available, with around nine-tenths of the unfunded accrued liability
of roughly $20 billion coming from the Teachers
Retirement System of Louisiana and the Louisiana State Employees Retirement System
(any subsequent UAL also has statutory limits on reductions for each system in
a relatively smaller aggregate amount, with 2038 as the last-established
deadline among these).
Because of the imperative, each
year the state must pay extra – beyond the statutory limits required for each
plan in each system – into pensions to make up for this UAL. That adds up to
around $1.5
billion extra footed by taxpayers annually just for these two systems,
which includes any local taxes paid as well concerning TRSL as about 90 percent
of its members fall under school district jurisdiction, with the remainder
under state jurisdiction covering higher education employees (not part of the
optional retirement plan) and directly state-run elementary and secondary
school employees.
Among other things, the actuarial
rate of return, sometimes called the discount rate, determines the amount
governments must pay in to meet their minimum match to employees’ contributions
plus any extra to pay off the UAL on schedule. In computing contributions, the
higher assumed this rate of return, the less needs contributing, meaning more
money left over for state and local governments to spend on other things and/or
the less need to raise taxes. For many years it had hovered at 8.25 percent for
many systems, but recently belatedly reduced in the case of LASERS and TRSL to
7.75 percent.
Last week, the state committee that
deals with actuarial matters of the pension systems including the setting of
the discount rate, the Public
Retirement Systems Actuarial Committee, met to decide, among other things,
the discount rate for at least the next few months, which would inform legislative
budgeting in the spring. The PRSAC has seven members: two executive branch
officials (or their designees), two legislative branch officials (or their
designees), two representatives of the 13 systems selected by the system
directors, and the Legislative Auditor, Daryl Purpura, the committee’s
chairman.
During it, Purpura brought forth
reports from his office concluded in the middle of the month concerning both LASERS
and TRSL.
The one for LASERS questioned its inflation assumption as too high and both of
these cast doubt on the assumed rate of return (the discount rate equals return
plus inflation, minus administrative and cost-of-living increase costs) for
each. The reports pointed out that the relatively high rate of return forecast
by each system, ones only a handful of systems across the country exceeded and
well above the consensus predicted by the investment community, and with their
histories of missing their forecasts over the past 27 years in the aggregate by
an average of about 100 basis points, suggested the unsustainability of the
7.75 percent rate as a sound estimation.
Thus, for both Purpura recommended
lowering the rate to 7.4 percent – and this rate, the reports argued, represented
almost the highest side of their judged reasonableness, while the lowest band
would have set it at 6.15 percent. This did not go down well with the actuaries
working for the systems, who spent around three hours testifying to explain why
their higher figures, despite the evidence from the LLA, made more sense.
Of course, they did this at the
behest of who they worked for, the systems, who if both had to go with the
level recommended by Purpura would end up having to raise an extra $133
million, beyond the nearly $1.5 billion extra and over $1.9 billion total bill
under the current rate, with agency contribution rates increasing roughly 2
percent to around 38 percent for LASERS and 27 percent for TRSL. Most of that
would come from state taxpayers: all for LASERS and much for TRSL to pay for
the portion of higher education employees not on the optional retirement plan
and because most of the money used for operating expenses in elementary and
secondary education pass through from the state-funded Minimum Foundation
Program.
That also made the proposal a no-go
zone for the politicians, for they would have to scrape up most of that from
the state budget, in the form of increased taxes and/or service cuts, which exists
already in a perilous state for this and next fiscal year. In the end, for both
systems PRSAC members unanimously voted to keep the 7.75 percent rate,
although Purpura squeezed from them a largely meaningless concession to meet
again prior to the end of regular legislative session to review matters again.
In essence, the can got kicked down
the road again. That thinking allowed the $3.1 billion UAL nearly 30 years ago to
mushroom into a behemoth over six times that size now and even the compelling
case of the LLA could not reverse that mode on this occasion. The day of
reckoning continues to advance, and, as
my colleagues at The Advocate point
out, most state policy-makers show no signs of trading the grasshopper
mentality for that of the ant.
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