As much deserved attention has gone to the budgetary difficulties Louisiana faces in fiscal year 2011-12, undeservedly pushed out of focus has been the ticking time bomb known as Louisiana’s unfunded accrued liability (UAL) for its pensions to state workers. State politicians and retirement systems officials don’t want people to think it’s a problem, but pesky watchdogs keep trying to counter that illusion.
The latest comes from an article in National Affairs that looks at the postures of all states on this matter and finds most of them having at least some problems (it also includes an analysis of expected health care-related forecast expenditures as well). Louisiana is ranked as having the tenth worst situation in per capita terms at a total between pensions and health care of around $24 billion or $6,000 per capita.
This comes on the heels of a report issued last year, again reviewing the sorry state of pension funding among states and which identified Louisiana as the sixth worst in fiscal shape, in that, at current rates, it would run out of money by 2020 and then present a bill for $4.3 billion or 27 percent of projected state revenues the next year (using a forecast of 8 percent return for and 3 percent revenue growth into the systems).
Naturally, the state officials in charge of the major pensions decided that this called for shooting the messenger. They put out various press releases (here and here) where they claim that because of the 1989 constitutional amendment that forced payoff of the UAL by 2029, there was no danger and that the rate of return was more than adequate to allay any concerns.
But what they didn’t admit was the payoff scenario, as legislators have punted on opportunities to sequester money in good times to reduce the UAL, has become increasingly unsustainable. In 2008, only about two-thirds of the actual required payout was coming into the system, at that time leaving a $4.4 billion gap. By 2010, the state was sinking about $690 million annually into paying off the UAL, a figure which will soon top $1 billion a year or well over 10 percent of forecast general fund revenues.
As an indicator of the situation, the latest memo that went out to state budgeting units assigning them their share of expenses – that is, what must come from taxpayer dollars – to cover the UAL was anywhere from 17.73 to 29.33 percent of base pay, which, depending on the system, slightly exceeds to tripling the “normal” amount that covers regular, non-UAL obligations. Which leads to the question asked by the studies and ignored by officials – where is the money going to come from to pay for all of this, regardless of any constitutional imperatives to pay for it?
One suggested solution has been to create a special financing program through the federal government that would issue bonds to cover the UAL, in exchange for state radically changing their pension philosophies, in the main shifting from a defined benefit to a defined contribution system. The present defined benefits systems created extraordinarily generous payouts while a defined contribution system would keep money out of state government hands and in the pockets of the state employees who then could invest it as they like.
Louisiana has an optional retirement system for over two decades now for its educators that allows for this, but it is voluntary. Legislation that would have made it mandatory for new hires died in the Legislature last year, under pressure from the state’s money-handlers who desire to keep their jobs and control over billions of dollars in assets. At least the problem can be stemmed in terms of adding to the UAL with this reform, and then maybe something done to ensure that revenues will appear to offset what UAL has accrued. But make no mistake, even if years away the crisis exists, even if state officials try to downplay it and state lawmakers refuse to act appropriately about it.
Posted by Jeff Sadow at 09:20