A state board you’ve probably never heard of might start changing its ways — after helping to dig taxpayers into a hole several billion bucks deep.
The Public Retirement Systems’ Actuarial Committee met last month to make decisions about several, relatively small Louisiana state retirement systems. The body, comprised of representatives from the Legislature, governor, treasurer, the legislative auditor, and two citizens, had met in January to consider the four largest systems.
Each year, by the end of February, the committee must determine the discount rate, or assumed rate of return, for each system. Every state agency, plus local governments if they are part of a system, uses this number to compute what it must contribute for future pension payments as a percentage of their payroll.
The higher the rate, the smaller the amount necessary to pay in, since greater investment gains will provide more coverage. In fact, in recent years for most systems, the rates assumed returns beyond what agencies would have to contribute.
Unfortunately, it’s not as simple as that because of unfunded accrued liabilities — the forecasted gap between money needed to distribute to retirees in the future and the dollars now predicted to be available when that financial obligation comes due. Louisiana sits on a cumulative UAL in the range of $20 billion, and the Louisiana Constitution requires the state to reduce that liability to a much more manageable number by 2029.
This requirement hikes dramatically the proportions paid by agencies. For example, the largest system in assets, the Teachers Retirement System of Louisiana, next fiscal year will charge an aggregate average of 26.5 percent, or more than 22 percent above normal, computed from a 7.65 percent discount rate. Applied to TRSL, the legal imperative will cost state and local taxpayers over $250 million extra this upcoming fiscal year.
Because of this, politicians and bureaucrats prefer higher rates. As these rates descend, the increasing costs strain the budget more, which both legislators and the governor wish to avoid. Further, higher rates imply that systems officials do a better job of managing assets.
TRSL, which accounts for about half of the unfunded accrued liability, is a compelling example. Not only did its performance over the past decade through FY 2017 lag the equity markets, but it also fell even further behind relative to the discount rate. Over that span, the Standard and Poor’s 500 index rose an average of 7 percent annually compared to TRSL’s actuarial average rate of 5.7 percent, but the discount rate assumed yearly returns declining slightly from 8.25 to 7.75 percent.
So, it’s a case of pay now or pay more later. Had TRSL used a more realistic rate and cost the state more in the past, today’s taxpayers would face a smaller UAL over the next 11 years. Yet, despite this track record, PRSAC has continued approving inflated estimates that facilitate more government spending in other areas.
However, during the most recent meeting, two PRSAC members said enough was enough. Wanting lower numbers, state Rep. Kevin Pearson and Legislative Auditor Daryl Purpera voted against recommended rates for several smaller systems. Pearson observed that the eight largest actuarial services looking at investment portfolios similar to those in the statewide plans came up with an average forecast about a point below what PRSAC approved.
Although unsuccessful in their effort, the dissenters acted commendably, and panel members should heed their caution in the future. Fictive numbers encourage overspending and disregard the day of UAL reckoning. As Purpera said, “deciding what’s best for the budget isn’t PRSAC’s function ... We’re supposed to be the control that makes sure the systems are funded properly.”
Jeff Sadow is an associate professor of political science at Louisiana State University-Shreveport, where he teaches Louisiana government. He is author of a blog about Louisiana politics at www.between-lines.com, where links to information in this column may be found. When the Louisiana Legislature is in session, he writes about legislation in it at www.laleglog.com. Follow him on Twitter, @jsadowadvocate or email firstname.lastname@example.org. His views do not necessarily express those of his employer.