A proposal to borrow money to help reduce state pension system debts got shot down quickly Monday.
The idea was to borrow money that would be used to pay one lump sum and buy out the pensions of vested retirees who have not yet begun to draw their benefits. Waiting before drawing on a pension allows the retiree’s pension to increase in value. Paying off the benefits of those retirees would reduce the state’s $20 billion long-term debt obligations, called the unfunded accrued liability.
But a state treasury official, the Legislature’s actuary and two state retirement system chiefs all testified that the idea was plagued with problems.
Just how many vested retirees could take part in such a program, if approved, is unclear. However, the Teachers Retirement System of Louisiana has 6,336 vested but inactive members, and the value of their pensions is $283 million.
Maureen Westgard, executive director of the Teachers Retirement System, said her board “has viewed (the idea of borrowing) as highly risky” in the past.
The testimony came as the state House Retirement Committee took up a study resolution passed during the 2014 Legislature. Committee Chairman Kevin Pearson’s resolution involved offering an optional lump-sum pension buyout to certain vested, inactive members.
The state would borrow the money to cover the buyouts. “The borrowing costs to finance such buyouts would be less than the interest rate on the unfunded accrued liability associated with such benefits,” the resolution stated, thereby improving the pension system’s finances.
Goldman Sachs pitched the idea of “pension obligation bonds,” and he wanted to see if the idea was a viable one, said Pearson, R-Slidell.
“Pension obligation bond history has not been very favorable,” said legislative actuary Paul Richmond, who noted a disaster involving the New Orleans firefighters retirement system.
First Assistant State Treasurer Ron Henson said the state is restricted in its ability to issue debt by a limit on the money it can spend annually in debt payments.
Further, he said, borrowing is already planned for state and local projects that legislators and their constituents want. “Our debt capacity will not allow the luxury of issues like these,” Henson said.
Louisiana State Employees Retirement System Executive Director Cindy Rougeou said it’s uncertain whether the idea would produce a savings or a cost.
“The overall debt is not being reduced. It’s just restructuring part of the overall UAL debt for a hard bond debt,” she said. “It’s almost taking out a second mortgage.”