The annual cost to maintain the Louisiana state employee and teacher retirement programs and to make payments to cover the unfunded accrued liability (UAL) is about $2 billion. The UAL is an estimate of how much money the retirement systems need, in addition to current assets, to pay for all future benefits. Louisiana has a UAL of more than $20 billion for its four state retirement systems combined. Most of that debt resides with the teachers’ pension.
Among all states, Louisiana has one of the lowest funding level ratios to meet its long-term retirement needs. However, the state has consistently met its payment schedule to try to catch up. The UAL basically is being handled like a set of loans. For a large, old portion of the UAL, small payments began in the early 1990s that did not fully service the interest; the payments were scheduled to increase over time and were heavily back-loaded. The reckoning is now upon us. Only recently did the state begin paying down the actual principal of the initial UAL.
But here’s the part that affects the state budget: the UAL payment schedule has required sharply escalating annual amounts in the past 12 years and still calls for moderately increasing amounts almost every year until 2027. The annual UAL payments for the teachers’ and LASERS state employee systems was just over $500 million in 2007. The annual bill in 2016 was $1.63 billion and the amount will graduate to $1.94 billion by 2027. By 2029, the oldest portion of the pension debt, known as the Initial UAL, will be paid off. From that point, the annual UAL payments will settle down to $1.36 billion until 2039. And that’s if all goes as planned.
There is no separate line item for retirement expenses in the state appropriations bill. The money for these payments is borne by state agencies, universities and school districts. The agencies simply have to bear the cost within their assigned budgets. That means agencies and colleges have an escalating floor of retirement costs. Federal dollars for health care and social services also can be used toward the pension liabilities; the Charity hospital privatizations reduced the use of federal dollars but will create an overall savings in pension costs in the long term. State agencies must bear these retirement expenses along with rising costs for Group Benefits, risk management insurance and auditing fees. These costs are mandated by law. Actions by the Legislature and the administration would be needed to reduce the agencies’ costs for these programs.
A number of measures in the past decade have lowered the cost of the state’s pension obligations. For example, new employees hired in recent years do not have the same generous terms and earlier retirement age options as their more veteran co-workers. A law was passed to prevent windfall pension income resulting from salary spiking just before retirement. New provisions in law encourage the use of one-time revenue to reduce the UAL and some bonus payments have been made to write down the debt. Progress was made with a cost-saving improvement to the state retirement systems’ method of providing cost-of-living adjustments (COLAs). This change, supported by PAR, would save an estimated $5 billion over 30 years. But the year after passing this cost-saving measure, the Legislature back-tracked and approved a COLA out of conformity with the reform.
Because many individuals have accrued benefits over the years, most of Louisiana’s UAL debt will re-main no matter what pension reforms are made. But the existing financial burden and the risk of even higher levels of unfunded liabilities could be reduced. A first step would be to implement a retirement program for new employees that carries a zero or low risk of accumulating unfunded liabilities. Changes affecting current employees also could lessen the state’s pension liabilities.
These initiatives are complicated by constitutional protections for employees and lawmakers’ concerns about fairness. It is legally easier for private sector companies to halt a pension program than it is for the state. Also, state employees and teachers are not enrolled or covered by the federal Social Security program, which provides a safety net for disability and survivor benefits as well as some guaranteed retirement income for the vast majority of American workers. This is a major element in the state retirement reform picture, particularly when compared to private sector employee retirement plans that offer a 401(k) combined with a base of Social Security benefits.
The bottom line is that state agency budgets are burdened by rising retirement costs, much of which will simply have to be paid and some of which might be reduced under correct reforms. In the meantime, the state could make deeper payments using one-time money to reduce the UAL.