Reforms needed to reign in state retirement debt
By Dan Juneau - Feb 09, 2012
Governor Bobby Jindal recently revealed his legislative package to revamp the way Louisiana funds its state retirement plans. His proposals aim to tackle accumulated unfunded pension debt that began accruing back in 1936 with the creation of the teachers’ retirement system. Eventually, additional systems were established, including those for state police, school employees, and rank-and-file state workers.
Each new pension system was created without a proper funding mechanism. When Louisiana’s pension debt reached an unbearable $5.8 billion in 1987, lawmakers finally decided to take action. They passed a constitutional amendment, ratified by the voters, which assured that these pension systems would pay off the $5.8 billion debt by June 30, 2029. The payoff date is now just 17 years away.
Meanwhile this $5.8 billion debt has mushroomed to around $18.5 billion, and it is a huge burden on our state general fund. But Louisiana is not unique: According to the 2010 Pew Center on the States report, all state and local government pensions in the U.S. face a combined liability of more than $3.35 trillion for retirement benefits promised to their public-sector employees. And while $2.35 trillion in assets is available to pay for those promises, a shortfall of $1 trillion remains for taxpayers to come up with sometime in the next 30 years. That’s about $8,800 for every U.S. household.
The Pew report also reveals that 21 states are funding their pension obligations below 80%. Unfortunately, Louisiana is one of those states. According to 2011 financial reports, Louisiana’s top four statewide retirement systems have an average funded ratio of only 56.7%. In other words, the state has only a little more than half of the money it needs to pay off this debt.
Where does this leave Louisiana? In a very tough situation. Lawmakers must take steps to stop the bleeding immediately. The Governor’s new plan to overhaul the current debt-laden system could move us in the right direction. For instance, he has proposed a portable hybrid ‘cash-balance’ pension plan for new state workers, giving them more flexibility and freedom in their careers. The proposed change would also result in a system that does not create a new unfunded accrued liability, and it would ensure that the state delivers a benefit no greater than it can get with market returns. Governor Jindal has also proposed increasing the retirement age for state workers to 67, consistent with the federal Social Security program. Those 55 or older and approaching retirement would not be impacted. Another cost-saving measure merges the Louisiana School Employees’ Retirement System (LSERS) into the Teachers’ Retirement System of Louisiana (TRSL) to streamline administrative and overhead costs. Today, LSERS has an excessively high administrative cost per member, which is well above the national average. Also, the ratio of LSERS and TRSL staff to plan participants is well above industry standards.
The steps Governor Jindal proposes to take are critical as Louisiana’s ballooning pension debt draws down more and more taxpayer dollars from the general fund. These small steps are essential to the sustainability of our state-backed pension funds. As it currently stands, Louisiana will make its final payment on the initial 1987 debt in June 2029. Estimates show that last payment will be somewhere between $1.3 and $1.9 billion. But then, in 2030, we begin to make payments on the unfunded debt for benefits that were paid to state employees after 1987. So, the cycle continues.
Did Louisiana’s state workers earn their retirements? You bet they did. Politicians have historically failed to fund the pension benefits they have promised. The question is will they acknowledge the reality of this ticking time bomb or continue to refuse to act responsibly for the benefit of the taxpayers and state workers? The time for addressing this ticking time bomb is now!
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