The $17.7 billion long-term debt of Louisiana’s teacher and state employee pension plans just got larger.
Known as “unfunded accrued liabilities,” the UAL for the state’s teachers’ and employees’ retirements has hit the $19.2 billion mark.
It represents how far short the systems are from having the assets necessary to pay their long-term pension obligations, a debt for which the state’s taxpayers are ultimately responsible. The systems include more than 240,000 active and retiree members.
State officials and legislators are aware of the increased debt but say it’s under control.
“What you are seeing is a short-term impact with a long-term gain,” said Cindy Rougeou, the executive director of the Louisiana State Employees Retirement System, or LASERS. “Going forward it will create greater budget stability and system sustainability.”
The $1.45 billion jump in debt comes as both pension systems registered record investment earnings, approaching 20 percent each. Laws aimed at reducing the debt and state financial exposure over time started kicking in.
At the same time, however, the Legislature and the pension systems and their oversight body made two big changes in the formula on which the financial evaluation is made. Those changes — promoted as “reforms” — led to a calculation that increased the systems’ debts. The Teachers Retirement System of Louisiana debt jumped from $11.3 billion to $11.9 billion and the LASERS debt from $6.44 billion to $7.27 billion under new evaluations that took into account the changes.
Absent the alterations, the unfunded accrued liabilities of TRSL and LASERS would have declined instead of increased. The teachers’ UAL would sit at $10.5 billion and LASERS at $5.9 billion, according to the systems’ actuary.
The UAL is largely the result of chronic government underfunding of the pension benefits promised to workers. Louisiana voters approved a constitutional amendment requiring those debts to be paid off by 2029. That debt plus interest on it is responsible for most of the unfunded liability. Just recently, the debt payments started paying on the principal. The state and school boards, as employers, are making those debt payments as well as the usual contributions for employees, putting a strain on their finances.
In recent years, a spate of new laws have been passed to reduce future pension costs and free up more funds to go toward debt reduction.
Enter the new changes that are having what Rougeou called “a one-time impact” on the UAL for the greater good.
The Legislature — with backing from TRSL and LASERS — moved to a new method of calculating pension costs. The “entry age normal” method levels out the annual retirement contribution over a member’s working career. Before the change, the contribution started off lower, then increased annually as an employee neared retirement. By leveling out over time, the contributions become more predictable, more easily stabilized, and the method avoids a spike in required contributions as an employee nears retirement.
“It gives us a stable funding payment stream,” TRSL executive director Maureen Westgard said.
State Rep. Kevin Pearson, who chairs the House Retirement Committee that oversees the state pension plans, said entry age normal is “a more logical way to pay for the retirement over the course of someone’s career, instead of back-ending it.”
Moving to the entry age normal resulted in a one-time increase in system liabilities because of the leveling. But in return there will be a continuing reduction in the contributions state government and school systems must make toward their employees’ pensions, starting in the new budget year.
Legislative Auditor Daryl Purpera said the Governmental Accounting Standards Board is now requiring pension systems to use entry age normal for accounting purposes. “Actuaries agree it is the better method,” he said.
Louisiana’s two other statewide retirement systems — the Louisiana State Police Retirement and Louisiana School Employees Retirement Systems — have used that method for years.
Pension system liabilities also increased because both TRSL and LASERS, with the blessing of a state pension actuarial board, decided to reduce their projected annual investment returns from 8 percent to 7.75 percent. All the earnings above that mark go to paying off the debt.
Because the systems expect to earn less, the more money made over the 7.75 percent mark means the more money that can go toward paying off debt and thus end up lowering payments required of the state. But in the meantime it translates into lower financial expectations.
“You are recognizing more realistic numbers than you were before,” said Pearson, R-Slidell. “It’s very responsible what we have done.”
Westgard said, “7.75 percent is a reasonable assumed rate of return.”
Those who closely monitor pension system operations agree that the UAL increase should not cause alarm.
“The UAL is an actuarial number, which does not realize the full investment gains” of the systems, Pearson said. Only one-fifth of the pension systems’ investment earnings are used in any one year, under a process called “smoothing,” he said.
Smoothing is designed to gradually recognize investment gains and losses, said systems actuary Shelley Johnson. “We are still realizing investment gains.”
The teachers’ system assets rose $2.33 billion over last year and stand at $17 billion. LASERS assets increased $1.3 billion from the prior year to $11 billion.
“We do have expectations that the UAL will decrease every year based on the principle (debt) payments,” Johnson said. “We also happen to be in a very good position in terms of investment gains.”
Johnson, Rougeou and Westgard said the law changes approved in recent years will also start having an impact on how well-funded the systems will be in the future.
“You have to be patient because benefits will develop over time,” Johnson said.
Among the major changes is legislation approved in the 2014 legislative session that is projected to save taxpayers $5 billion over time because pension debts will be paid off sooner. The legislation, sponsored by state Rep. Joel Robideaux, R-Lafayette, puts more of retirement system “excess earnings” — those over 7.75 percent — toward debt retirement before dollars are put into a special account through which retiree cost-of-living raises are funded.
“I’m always concerned with the (UAL) number going up. But the number is simply an estimate,” Purpera said. “We made some pretty good changes.”
“The real issue is do you have a plan to resolve the liability you do have and are you working on that plan?” he said.
Purpera said there is a plan to pay off “a substantial portion” of the UAL — old pension debts — by 2029, and the state is moving down that road.
“The biggest thing is not to back off and say we need a holiday in paying this year because we can’t afford it,” said Pearson.
Follow Marsha Shuler on Twitter, @MarshaShulerCNB.
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