Over $17 billion in unfunded liabilities for two state pensions
A study of the 100 largest public pension plans in the U.S. highlights Louisiana’s pension fund troubles. The 2012 Public Pension Funding Study was conducted by Milliman Inc., an independent actuarial and consulting firm. The public pension plans were measured based on accrued liability, or the total amount each fund has promised to pay beneficiaries in the future. Two Louisiana pensions are included in the study, the Louisiana State Employees Retirement System (LASERS) and the Teachers’ Retirement System of Louisiana (TRSL).
A large accrued liability is not necessarily a problem. States that properly fund their pensions over the years will have the resources to honor their commitments. However, many of the nation’s largest public pensions have not been properly funded. They now face an enormous unfunded accrued liability (UAL), which is the gap between promised benefits and what the pension funds actually have on hand to pay these obligations.
LASERS has a UAL of $6.5 billion, representing 42% of its accrued liability. TRSL has a UAL of $10.8 billion, representing 45% of its accrued liability. Their high percentage of unfunded liabilities puts both funds among the nation’s 15 worst offenders in the study.
To make matters worse, the pension funds may be using an unrealistic discount rate when making their forecasts. LASERS and TRSL use discount rates of 8% and 8.25%, respectively. When their investments fall short of these high expectations the UAL can increase dramatically. Policy analysts have called for states to adopt more modest discount rates but doing so would force states to acknowledge a larger UAL.
In a worst case scenario, Louisiana’s pension fund could run dry by 2017, according to The Day of Reckoning, a study by Northwestern University. While such an outcome seems unlikely, the effects of this problem are already being felt. State employers are have been required to make larger payments into employee retirement plans, leaving less money for current needs. This means police departments with fewer cops on the beat and schools with fewer teachers in the classroom. The alternative is raising taxes, never a popular option.
Pension reform was a major issue in the 2012 legislative session. However, only one of Gov. Bobby Jindal’s several pension reform bills was passed. Rep. Kevin Pearson’s (R-Slidell) legislation will require certain new hires to be enrolled in a “cash balance” plan, a hybrid of the traditional defined benefit and defined contribution plans. The legislation is now the subject of a lawsuit, as the Retired State Employees Association allege it was passed unconstitutionally because it didn’t receive the support of two-thirds of the state House.
While the cash-balance approach could save Louisiana $52 million over 5 years, other measures will need to be taken. These could include reforms that did not pass the legislature this year, such as increasing employee contributions, raising the retirement age to 67, and calculating retirement benefits based on the final five years of salary rather than three. Whether or not any of these proposals make it onto the legislative agenda next April, Louisianans should expect unfunded pension liabilities to be an area of concern for years to come.
Read more about Louisiana’s pension troubles in The Big Debt.