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    LASERS Response to Public Pension Reports: Are the Current National Reports Correct ?

    Pensions are a Relatively Small Portion of State and Local Budgets

    On February 14, 2011, Keith Brainard, Director of Research for the National Association of State Retirement Administrators, (NASRA), testified before the U. S. House Judiciary Subcommittee on Courts, Commercial and Administrative Law.1  Mr. Brainard informed the subcommittee that “State and local spending on public pensions is the employers’ annual contribution to the pension trust – not the amount paid out of the trust each year to retirees. The percentage of all state and local government spending on pensions has hovered around three percent during the last decade.”

    With respect to LASERS, the percentage is smaller than the national average. For Fiscal Year 2010-2011, the state contribution to LASERS accounts for only 2.2% of the total state budget (Fiscal Year 2010-2011 Total Louisiana Budget – General Appropriations [$27,002,190,991]). In addition, LASERS paid over $860 million in benefits and refunds in Fiscal Year End 2010. Over 90% of LASERS retirees and beneficiaries live in Louisiana, creating a significant positive impact on our state and hometown economies.

    Market and Actuarial Returns: Short-Term/Long-Term

    LASERS, like all investors, was not immune to the recent market volatility, often referred to as “The Great Recession.” LASERS also experienced and overcame the market downturn following September 11, 2001. At this point, it is important to note that LASERS has an expected actuarial return target of 8.25%.2

    The 18.7% Fiscal Year-to-Date market return earned by LASERS places our system among the top 3% of our comparable peers nationally.3   From February 2009, through December 2010, LASERS added approximately $3 billion to our fund. Our market returns have also exceeded the S&P 500 for one, five, and seven years.

    Public pension plans operate over very long time frames and manage assets for many participants whose involvement with the plan can last more than half of a century. While a 20 year window may be an appropriate sample for an individualized 401(k) account, a pension plan has a much longer horizon in mind when investing.
    • As of FYE 2009 - LASERS 25 year compounded actuarial return average is 8.41%.
    • As of FYE 2010 - LASERS 26 year compounded actuarial return average is 8.17%.
    • LASERS has exceeded the assumed 8.25% actuarial return in 19 of the past 26 years.
    System Liquidity
     
    In the past year, our contributions, dividends, interest payments and distributions are roughly equal to the amount of benefits we pay. Certain national reports have created needless alarm by declaring that the pension systems will “go broke” in the next decade. This unfortunate conclusion arises from the misplaced assertion that funding and return expectations should be based on the market value of liabilities. Such is neither a realistic nor accurate measure for public pensions. This is compounded by the error in failing to recognize that for nearly two decades the State of Louisiana, in compliance with a constitutional mandate, has made the requisite employer contribution to the retirement system. (This contribution consists of the “normal cost” of the accruing benefit as well as the debt payment for prior insufficient contributions.)
     
    Our historical experience counters the insolvency suggestion. These reports create a deceptive impression of imminent pension insolvency by discounting future pension liabilities at a risk-free rate, (approximately 4%). Presuming a risk-free rate rather than our current expected actuarial rate of return not only defies our actual long-term experience but would result in a substantial and unwarranted increase for the State of Louisiana in its employer contribution.
     
    Recognizing that the payment schedule for the employer contribution rate needed revising, in 2009 the Louisiana legislature passed Act 497, which is expected to save the state over $500 million.
     
    In a 2008 report, the Government Accountability Office stated, “[U]nfunded liabilities are generally not paid off in a single year, so it can be misleading to review total unfunded liabilities without knowing the length of the period over which the government plans to pay them off.” 4
     
    The employer contribution toward the “normal cost” (or the cost of the LASERS retirement benefit now accruing) is a very small portion of payroll; about 6.6%. The debt payment comprises the balance of the state’s employer contribution. Again, contrary to national reports, switching to a defined contribution (DC) plan will not reduce the system debt. This debt is a result of an insufficient employer contribution over many decades.
     
    Moving to a DC plan would have absolutely no impact on the requirement that the debt be paid. It would result in a state contribution for new hires of 6.2% if they are then included in Social Security, plus the cost of a state contribution into a 401(k) type plan.
     
    While the unfunded accrued liability looks daunting, it is actually somewhat analogous to a mortgage. The fact that the debt exists does not mean it is due and payable today. It is due over many years. A recent PEW report recognized Louisiana as one of 10 leading states in paying the annual pension bill.5

    Is the benefit too generous?

    The average benefit for our rank-and-file members is $19,140 per year. Our public employees DO NOT participate in Social Security, making an “apples-to-apples” comparison between public and private pensions misleading. LASERS is the retirement security for our retirees.
     
    In pronouncing this pension overly generous, the Pelican Post exclaimed, “Rather than continue this calamitous path, lawmakers should examine the conversion of current “defined benefit” plans into “defined contribution” plans, similar to a 401(k) or IRA account. This approach… is an option in several state pension programs, including those in Nebraska, Michigan, Florida and West Virginia.” 6
     
    The author failed to mention that in ALL four states cited as examples, public employees are covered by Social Security.
     
    In addition to being taxpayers themselves, it should also be noted that our members are required to contribute a percentage of their wages toward their pension. These contributions, along with investment earnings, comprise the majority of public pension fund revenues.
     
    Significant Benefit Reforms Already Enacted
     
    Steps taken to address the LASERS Unfunded Accrued Liability (UAL):
     
    1987 – Act 947 (Constitutional Amendment)
    • Requires retirement systems to be actuarially sound
    • UAL (UAL as of 1988) must be paid off by 2029

    1988 – Act 81 of 1988
    • Increased the rank and file employee contribution rate from 7% to 7.5%

    2005 – Act 75 - Rank and File members hired after 7/1/2006
    • Increased employee contribution rate from 7.5 percent to 8.0 percent
    • Limited retirement eligibility to 10 years of service at age 60
    • Increased Final Average Compensation (FAC) used to determine retirement benefit from 3 years to 5 years
    • Salary spiking cap reduced from 25% to 15%

    2007 – Act 484 (Constitutional Amendment)
    • Requires retirement provisions with a cost to have a new or additional funding source and be paid within 10 years

    2009 – Act 497
    • Used legislative appropriations from 2006 and 2008 to reduce IUAL
    • Used funds from Employee Experience Account to reduce UAL
    • Restructured liability payments to reduce future payments
    • Prioritized excess investment earnings’ application to debt
    • Reduced UAL by approximately $500 million

    2010 – Act 1048 (Constitutional Amendment)
    • Requires 2/3 legislative approval of retirement provisions with an actuarial cost

    2010 – Act 992
    • Consolidates plans for new hires
    • Applies 8% employee contribution rate; 60 month FAC; 15% salary spiking cap to other groups
    • Hazardous Duty plans consolidated; benefits adjusted for consistency
    • Survivor benefits modified
    Actuarial returns over 8.25% assist in reducing the employer contribution rate
    LASERS current FYTD (through January) market returns = 18.7% 
    LASERS compounded average 20 year actuarial return through June 2008 = 8.9%
    As of FYE 2009 - LASERS 25 year compounded actuarial return average is 8.41%
    As of FYE 2010 - LASERS 26 year compounded actuarial return average is 8.17%*
    (*.08% from our target return even following the Great Recession)
    Assets as of December 31, 2010 = $8.9 billion
    State employer contribution to LASERS (UAL plus normal cost) as percent of FY 2011 general appropriations bill = 2.21%
     
    State employer contribution to LASERS (UAL plus normal cost) as percent of FY 2011 total budget (includes capital outlay, judicial, ancillary, etc.) = 1.97%
    Among peers (public pension plans over $1 billion) LASERS ranks in top 3% nationally
    ______________________
    1    “The Role of Public Employee Pensions in Contributing to State Insolvency and the Possibility of a State Bankruptcy Chapter”
    2     The Loop Capital Markets 2010 State Pension Funding Review Report showed that of 242 public pension systems listed, 18% had target returns equal to or higher than LASERS.
    3    Trust Universe Comparison Service for plans greater than $1 billion, 12/31/2010
    4    U.S. Government Accountability Office, “State and Local Government Pension Plans; Current Structure and Funding Status,” July 2008 GAO-08-983T.
    5     The PEW Center on the States: “Promises with a Price Public Sector Retirement Benefits”
    6    “Bauman, Naomi Lopez “Louisiana’s Fiscal Albatross: The Coming Public Pension Crisis.” The Pelican Post. 01 Feb. 2011.
     

    Quick Links:

    Pensions are a Relatively Small Portion of State and Local Budgets

    Market and Actuarial Returns: Short-Term/Long-Term

    System Liquidity

    Is the benefit too generous?

    Significant Benefit Reforms Already Enacted

    Footnotes


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