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.