Louisiana’s pension systems had an imposing level of debt, amounting to about $18.2 billion and representing lower funding levels than many other states in 2017, a new report has found.
But the state has shown some signs of progress in its ability to pay down that debt – called “unfunded accrued liabilities” or UAL – which has dragged on Louisiana’s budget for years, according to the Pew Charitable Trusts’ annual report on state pensions.
Louisiana’s pension systems had nearly $34 billion in assets and $52.2 billion in liabilities in 2017, according to the report, a gap of $18.2 billion in its ability to pay future benefits that will come due down the road. Louisiana’s pensions were 65% funded in this metric, compared to 69% nationally. Louisiana is one of 20 states with less than two-thirds of the assets it needs to pay its future pension obligations.
That $18.2 billion gap represents a decline of nearly $2.5 billion from the year before, Pew found. The drop comes as pension systems throughout the U.S. experienced a strong performance in the stock market and with other investments that boosted their financial positions.
However, that trend is not a cure-all for pension systems, many of which have large funding gaps, said David Draine, a senior officer at Pew.
“States can’t invest their way out of this,” Draine said in a conference call with reporters. “Even with this improvement … It’s still a cause for concern.”
Louisiana outperformed most other states in a benchmark called net amortization, which measures whether a pension system is paying down the principal on its debt. While most states fell short of the benchmark, Louisiana paid more than enough to stop its debt from growing, Pew found.
Steven Procopio, policy director at the Public Affairs Research Council of Louisiana, a Baton Rouge-based think tank that has pushed for changes to Louisiana's pension system, said the report shows the state is now making the payments "we should have been made a long time ago."
Louisiana's pensions started paying benefits to retirees immediately after being created in the 1930s and 1940s. But the systems weren't funded properly, and debt stacked up over the years. In 1989, the state began paying down that debt, but scheduled the payments in a way that grew the unfunded liabilities even more.
While the state is now making payments, Procopio said the pension systems are 65% funded at the top of a bull market.
"We might continue to make some progress if the market continues to go up," he said. "But eventually, as all markets do, this will turn. And where will we be then if we’re at 65% funding now?”
Procopio and PAR want to see pension systems adopt more conservative assumptions for how much money they will receive from their investments – a vital component of pension systems that determines how much needs to be paid into the system. He also said the pensions should reform how they handle cost of living adjustments, or COLAs, and "modernize" their plans.
The Louisiana State Employees Retirement System, one of four statewide pensions Pew analyzed, is 64.7% funded as of a year ago, said Maris LeBlanc, LASERS chief operating officer. LASERS’ funded ratio would exceed 70% if not for several policies put in place to improve the long-term financial outlook of the system, like lowering expectations for investment performance and changing some actuarial methods, Leblanc said.
Leblanc said LASERS is “pleased that Pew has recognized our positive number on net amortization,” which she highlighted as a better measure of the direction a pension plan is headed.
A bill pushed by LASERS – and backed by PAR last year – would have created a hybrid pension plan for future state employees that would incorporate a 401(k)-style investment account, but was shelved amid opposition from Gov. John Bel Edwards and unions who argued it would give workers a lower benefit. Proponents argued it would reduce pension debt while giving workers a more transferable benefit, as many workers don't stay long enough with the state to vest in the current pension plan.
The pension debt among Louisiana’s four statewide retirement systems – Teachers Retirement System, LASERS, School Employees Retirement System and State Police Retirement System – has weighed heavily on the state’s finances.
In the current budget year, the state will pay $712 million in employer contributions for LASERS, Leblanc said. $218.9 million of that pays the normal costs of the accruing benefits, while $493 million is dedicated to debt payments. Assuming costs remain relatively stable, the debt payment for LASERS in next year's budget will be north of $540 million.
The most recent supplemental budget bill passed by lawmakers recently also sent $31 million to pay down pension debt at the Teachers Retirement System and LASERS, as required by the state constitution.