Louisiana’s two largest statewide retirement systems took a step that could reduce their long-term debts and ultimately lower the costs paid for state government retirements.
The Louisiana State Employees Retirement System and the Teachers Retirement System of Louisiana boards voted to reduce their projected annual investment returns from 8 percent to 7.75 percent.
The investment returns are used in the calculation of the rates that government employers contribute toward funding the system.
Any earnings about the 7.75 percent return on the investments made by the pension systems go to paying down the “unfunded accrued liability,” said Legislative Auditor Daryl Purpera.
More commonly called the UAL, it is the amount of money that has not been set aside to cover the cost of pension benefits promised in the future. The UAL for the four statewide retirement systems now hovers near $19 billion.
State agencies and schools, the employers, are making additional payments to help lower the UAL, but those mandatory payments put a strain on the budgets for other expenses.
The change in interest rates approved by LASERS and Teachers, combined with a recently passed law, could relieve some of the budget pressures caused by the big payments.
“We have a severe problem with underfunding. If we have an opportunity to accelerate repayment of the UAL, we ought to be taking advantage of it,” said Purpera, who chairs the Public Retirement Systems Actuarial Committee.
LASERS Deputy Director Maris LeBlanc said: “Because we expect to earn less, then the more money we make over that is money to put toward the debt.”
The rate reduction under normal circumstances would trigger an increase in state and school systems’ contributions because the systems would count on less earnings from investments.
But the state and schools will end up paying the same or a little less because the reduction will go into effect at the same time as a law which directs more of the pension systems’ excess investment earnings into debt reduction, said Maureen Westgard, executive director of the Teachers system.
The Teachers board voted to lower the expected return because “any impact that would have been felt would be offset,” said Westgard.
“The way we presented it to our board is ‘the planets are aligned for us,’ ” said LASERS Executive Director Cindy Rougeou. “Based on things that happened during the legislative session and what we expect our investment returns will be ... we are expecting to reduce (the state contribution) by 1.5 percent.”
Rougeou said the calculation is based on a 14 percent investment return, “and we expect that’s going to be closer to 18 percent.”
Westgard said Teachers is anticipating a return of more than 17 percent during the fiscal year which ended June 30.
Both systems are chalking up big investment returns today, but the 30-year average return is 8.2 percent for LASERS and 8.54 percent for Teachers.
Westgard and Rougeou said the new 7.75 percent assumption is realistic. Both referred to a new National Association of State Retirement Administrators report which looked at 126 different public pension plans. More than half reduced their investment assumptions since 2008. The average is 7.72 percent — right at the 7.75 percent adopted by Teachers and LASERS.
Lowering the rate will help bring more funds into the system, said Rougeou. “You try to find that perfect balance,” she said. “If you lower the rate more than you need to, you are going to put a burden on current taxpayers they should not have to pay.”