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Policy-makers increase size of pension time bomb
The clock keeps ticking, but the mentality that has produced one of the nation’s largest unfunded accrued liabilities in Louisiana continues, increasing the chances for a rude blast going off in 2029.
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.
Posted by Jeff Sadow at 10:00