Letting higher education out of TRSL makes sense
The time has come for the idea behind SB 18, which would expand the direction in which Louisiana higher education already has headed on retirement matters that both would serve in general its employees better and improve its financial position without harming any others’.
The bill, by state Sen. Robert Adley, would allow any or all of the four higher education systems plus employees of the overseeing Board of Regents to pull out of the Teachers Retirement System of Louisiana after paying off its portions of TRSL’s voluminous unfunded accrued liability. This could be accomplished by issuing revenue bonds that pay the amount in full, leaving the elector agency to make periodic payments on those to debt holders.
The advantage of this arrangement comes if the periodic payment amounts are less than the extra amount the elector pays in now and in the future to offset the UAL, which constitutionally must be extinguished by 2029. Because TRSL is on the hook for nearly $12 billion while its total assets (as of the end of fiscal year 2014), agencies part of it currently pay a staggering amount to address the UAL each year. Typically, the employer would match the employees’ paid in, but, because of the UAL, last year employers contributed over $750 million more into TRSL, a 10:3 ratio instead of 1:1. For higher education, the amount may be even more severe; Louisiana State University Baton Rouge had 83 percent of its employer contributions go to paying down the UAL.
By contrast, paying out revenue bonds at today’s relatively low interest rates, which could be spread over more than the 13 years (as of this upcoming fiscal year) until UAL extinguishment, almost certainly would result in a lower annual payment than for the UAL payment at present. Rather than have employees in the defined benefit system that prompts this problem, what members who are not yet part of a defined contribution system – and virtually unique among state agencies, higher education has had an optional retirement system based upon this for almost a quarter of a century – would enter into one, funded initially by that portion removed from TRSL.
And not only would this arrangement save money, but it also would create more incentive to increase the amount of revenue for higher education from self-generated funds that would address the imbalance that historically has had taxpayers footing disproportionately higher education funding. By definition, revenue bonds have their income streams supported by revenues generated from the debtor agency, not from taxpayer funds as are general obligation bonds. Entering into this arrangement would add more compulsion to a potentially recalcitrant Legislature to pass necessary laws and/or to approve constitutional amendments to give control of tuition and fees to higher education, the present restrictions holding back the ability of higher education to ensure that students pay their fair share of overall funding of higher education and opening up the possibility of it earning more money to invest in itself.
Finally, the plan parses the apples and oranges that consist of the present arrangement. By allowing higher education to leave – its members comprise only about 10 percent of TRSL – it gets the state out of a system where uncoordinated local government policy, school boards, concerning pay and personnel unduly shape decisions made by TRSL. From a policy-making standpoint, it’s much more parsimonious to have decisions made about retirement financing on behalf of the state and its employees conforming to state goals and objectives primarily, not fashioned mainly by the decisions of 69 different local entities focused on local employees that inevitably condition the financial picture, even if TRSL is a state agency, because altogether their decisions separately affect the vast bulk of members and money contributed and paid out.
The idea makes so much sense that, naturally, TRSL opposes it, claiming that this goes too fast and is “complex,” even though a surface view of the numbers indicate savings. TRSL members in higher education would have their pensions repackaged into annuities or could have their contributions transferred into something like the ORP, a particularly appealing option for those in higher education for the reason that the option originally was granted, portability in employment. But as their payments comprise around a quarter of TRSL contributions, removal of these reduces the leverage and investment options for TRSL that can allow for larger returns and increased ability to wipe out the UAL, thus providing its unspoken hesitancy to accept the idea – and even provoking veiled threats that lawsuits could emerge unless only new hires were affected, which essentially scuttles the deal as obviously these future employees have nothing to do with the UAL.
It shouldn’t come to that, for an annuity plan should be able to be worked out for those retirees and active members who want to go the defined benefit option as part of this change. It’s in sorting out this that would determine whether the financing makes sense, the goal being to ensure that retiree payouts are the same. Yet the bill doesn’t mandate this process, only presenting the option for systems and the Regents if the numbers work out where they would be under no obligation at accept, rendering the TRSL complaints nonsensical. And why should TRSL, unless its real goal is to maintain control over as many future assets as possible, be so concerned about what happens after any systems leave; as long as it gets that share of the UAL paid into it, it’s made whole.
Thus, the bill will stand or fall not on the basis of financial sense, but on politics. At the very least, higher education should have this option, especially when the state’s bizarre fiscal structure makes it very vulnerable to larger economic trends. Allowing it to have more control over its fiscal environment can permit it more effectively to address fiscal concerns. Granting this ability is in the best interests of taxpayers generally, and higher education employees specifically.
Posted by Jeff Sadow at 10:50