While the decrease in Louisiana’s public debt outlined in the latest State Bond Commission debt report was touted by some as “all good news,” the report did not take into account unfunded pension benefits promised to public employees and educators, which currently exceed $11 billion across the two largest public plans alone.
After a decade of year-over-year increases, the updated Bond Commission report shows Louisiana’s current debt load dropping from $11.6 billion in 2017 to $11 billion in 2018. However, the report’s accounting is limited to state-issued bonds and debts secured by other local revenues such as tolls, leaving out pension debts that — when counted — would double the state’s total obligations.
Though unfunded public pension liabilities are not a traditional debt instrument like a bond, they might as well be. They are a constitutionally guaranteed retirement benefit, and like any other debt, must be paid down over time.
Take the Teachers’ Retirement System of Louisiana, the largest public pension system in the state, which currently has $9.8 billion in unfunded liabilities to make up, with just $21 billion in assets set aside to cover the $30.9 billion in promised pension benefits. Since the report did not include this significant debt owed to teachers along with its accounting of declining bond obligations, it would be understandable for the average Louisianian to mistakenly think that the state has moved away from taking on more debt.
Unlike general obligation bonds, revenue bonds and the other types of debt included in the Bond Commission’s report, public pension debt is not as clearly and easily organized. Pension debt is not issued one day with a predetermined maturity date. Pension debt ebbs and flows with the tide of global markets and relies on a variety of assumptions. Underperforming investments, systemic underfunding of actuarially determined contributions, and flawed cost-of-living-adjustment policies can all act like a log just below the waterline waiting to knock a pension system off its course, leading to growing unfunded liabilities.
In the case of TRSL, investment returns underperforming relative to expectations have added $4.2 billion to the system’s unfunded liability since 2000. During the bull market following the 2008 recession, pension system investments have only averaged 6.7% in returns according to TRSL — well below its current 7.65% investment return expectation.
The teachers’ pension system has problems beyond just market performance. State contributions to TRSL have fallen short of the interest accrued on the pension debt in 13 of the past 19 years, meaning that in most years’ interest on the pension debt has grown faster than the state can pay it down. This alone has added $1.2 billion to the system’s unfunded liabilities over the last 20 years, while a broken mechanism for granting post-retirement benefit increases to retirees has added $832 million in pension debt since 2000.
Bonded debt is not the only type of obligation for which the average taxpayer in the state is morally and legally beholden. And unlike most of the bond debt covered in the State Bond Commission’s report, the money marked for state public pension systems does not go to a bridge or road, but rather to a fellow Louisianian who has dedicated a life to providing a valuable public service to fellow citizens. Acknowledging that obligation and the systemic issues that put that obligation at risk is the first step to addressing the entire debt issue for the betterment of all Louisianans, present and future.
Steven Gassenberger is a Louisiana native and policy analyst for the Pension Integrity Project at the Los Angeles-based Reason Foundation, a libertarian think tank that recently published an analysis of TRSL solvency at reason.org/trsl.