It’s the time bomb Louisiana policy-makers, wishfully or otherwise, think has been defused, and thereby doesn’t receive the election-season attention that it should – and some, like Democrat Gov. John Bel Edwards, hope to hide their culpability in the service of an agenda to grow government.
Constitutionally, by 2029 the state must eliminate its unfunded accrued liabilities – that is, the amount actuarially required to pay off all anticipated future retirement obligations – that existed in 1988. While a few systems have done so, most haven’t including all the large ones. As of earlier this year, that accumulated debt equaled $18.2 billion, with over half in the Teachers Retirement System of Louisiana that covers traditional public school employees and a handful of others.
That payoff will cost taxpayers approaching an extra $2 billion this fiscal year, but policy-makers have proclaimed if the public can just bite that bullet for the next decade, all will be well. Once paid off, the remaining manageable level of anticipated debt the systems can endure without asking for extraordinary taxpayer contributions, they assume.
A recent report reminds otherwise. A state-focused financial policy analysis group, Truth in Accounting, recently released its 2019 reckoning of state fiscal conditions, based on 2018 data. Most states fared poorly, and Louisiana more than most. Unfunded pension obligations figure prominently in that report, along with retiree health care benefits.
This comes on the heels of an analysis by the Reason Foundation specifically on TRSL that shows that principally poor investment decisions – echoing this space over the years – ironically occurring over the past few years in an improving overall national economy, has led to increased deterioration relative to where payback should have been. Another factor has been chasing unrealistically higher returns that only gradually, particularly under the pressure of the Legislative Auditor on TRSL and the other statewide funds, have become scaled back modestly but insufficiently for realistic payoff calculations.
These mistakes matter because the entire UAL doesn’t disappear in 2029. The payoff affects only the “old” UAL, acquired up through FY 1988. For example, TRSL still will have a predicted UAL of $6.3 billion by then, which is the “new” UAL generated since the “old.” If so, that would represent something around 80 percent funded, which denotes minimally adequate funding, as opposed to the current 68 percent (two decades ago, TRSL in fact had achieved almost the 80 percent benchmark).
The problem is, if TRSL continues to underperform (in a future market environment that may not do as well as it has under Republican Pres. Donald Trump) and use unrealistic assumptions on which to determine employee and taxpayer contributions, the UAL will balloon much higher. Keep in mind that, with the majority of pensions monies banked and of UAL to eliminate, to some degree TRSL drives the entire issue.
Compounding this, policy aggravates the reemergence of a serious UAL. For example, the way in which cost of living adjustments are handled, where investment gains trigger these, robs a chance to trim the UAL, while losses don’t scale COLAs back but must be eaten into the UAL, subverting UAL defeasance.
More seriously, the state’s longtime fixation on a defined benefit retirement system has provided generously for retirees on the backs of taxpayers, instead of introducing elements of a defined contribution system that places more responsibility on state and school employees themselves. Several attempts to expand upon the limited range of defined contribution requirements or options over the years have met with sabotage by labor-backed special interests. The latest attempt, in 2018 with HB 39 by Republican state Rep. Barry Ivey, fell by the wayside from opposition by Edwards and his labor backers.
Edwards also bears the blame for fiscal policies he promoted that have discouraged economic growth. States with pro-growth policies tend to have higher funding ratios for their pension plans, and with the worst state economy in the aggregate of economic indicators for the past couple of years due to the largest tax increase in the state’s history and spending growth outpacing inflation and then some, that has aggravated the problem.
During this election season, candidates should bring handling of the UAL into the debate. Since Edwards’s election, conditions surrounding it have deteriorated enough that policy-makers cannot assume they have defused it successfully. Artificially creating a structural surplus that sucks more money out of taxpayers as a default mechanism to pay down the UAL rather than reforming the system is not an option.