In this legislative session, Louisiana’s lawmakers are trying to tackle some of the difficult issues facing the state. Many of the bills under consideration would affect the state’s public retirement systems, which impacts not only government workers and retirees but also the taxpayers who fund these benefits.
The most notable measures being considered align closely with three national public retirement plan trends dealing with the current rise in the cost of goods, states’ difficulty retaining public workers, and the politicization of public pension fund investments. Here’s the Pension Integrity Project’s overview of these trends and the public retirement-related legislation currently being considered in Louisiana.
The United States is experiencing the highest rate of inflation in 40 years, making everything more expensive, and several state bills under consideration in Baton Rouge grapple with how inflation impacts public pensions and retirees. Without Social Security, many retired from Louisiana’s public workforce have only their fixed public pension benefit through their golden years, leading retirees to be especially vulnerable to inflation. To address this issue, Louisiana public retirees depend on a complicated set of rules tying market returns to their pension systems’ ability to grant a cost-of-living adjustment (COLA). The result over the last decade has been “confusion surrounding when a COLA is likely to be granted as well as how much the ultimate cost to employers will be,” according to state actuaries.
In an effort to address retirees’ inflation concerns, State Sen. Edward Price, chairman of the Louisiana Senate Retirement Committee, introduced a suite of bills granting retirees of the three largest state-sponsored retirement systems a supplemental retirement benefit. For public employees, House Bill 5 would issue a supplemental benefit in the form of a one-time bonus—commonly referred to as a 13th check—that does not increase the base pension benefit for retirees in any future year.
The additional pension check is expected to cost the state approximately $85 million for retirees in the Louisiana State Employees’ Retirement System (LASERS). This cost is expected to be limited to the one-time check being issued and would not carry over to subsequent years.
The 13th check concept is not unique to Louisiana. In 2021, Texas lawmakers issued a 13th check to retired teachers, who hadn’t seen a cost-of-living adjustment for over a decade at the time. The mechanism for adjusting benefits to accommodate inflation built into the Texas system failed to trigger a payment. This was due to decades of inadequate funding into the pension system, stemming from a combination of outdated funding policies and underperforming investments. Texas lawmakers decided to issue a supplemental, one-time benefit payment from the state’s budget surplus to retirees. This differs from Louisiana’s proposal for an additional check, which would be funded with part of LASERS’ investment gains.
If lawmakers feel a 13th check is needed, the Texas approach would be better for Louisianans because it ensures the cost associated with this bonus is limited to one-time appropriations. In contrast, the cost of the proposed LASERS 13th check would extend beyond the initially reported price because the pension system would be paying for the bonus check by reducing its assets that should be generating investment returns over time.
Louisiana’s House Bill 6 and House Bill 7 would permanently increase public pension benefits, with state taxpayers as underwriters. Expected to initially cost the Teachers’ Retirement System of Louisiana (TRSL) $369 million and the Louisiana State Police Retirement System (LSPRS) $9.5 million, both TRSL and LSPRS permanent benefit increases bump retiree benefits indefinitely. This means the accuracy of each plans’ assumptions would dictate the ongoing costs of the benefit increase. If investment returns for either pension plan perform below expectations, the difference would either increase the systems’ unfunded liabilities or employer costs.
These bills use funds from each systems’ respective experience account to issue the one-time payment. Louisiana’s public pension experience accounts—created in 1992—use returns on pension investments above a set threshold to fund cost-of-living adjustments. The problem with this policy is that actuaries and plan administrators depend on good investment years to make up for any funding ground lost in the years that investments don’t meet expectations. Each plan’s experience account skims and redirects investment returns from each fund to pay for permanent benefit increases and this way of funding cost-of-living adjustments, Louisiana’s legislative auditor warns, empties each pension system’s experience account resulting “in an increase in expected future employer contributions.”
State Rep. Tony Bacala introduced a cost of living measure relating to the Municipal Police Employees’ Retirement System (MPERS). But instead of issuing an immediate, one-time 13th check or a permanent benefit increase, the measure would create a deposit account to hold employer contributions in anticipation of issuing a COLA. The measure differs from the LASER 13th check and other bills that include permanent benefit increases in that the bill funds COLAs by prefunding a separate account through employer contributions rather than excess investment returns.
Labor Market Challenges
A second major trend impacting the 2022 regular session is the growing challenge of retaining teachers, first responders, and other public workers amid a dramatic post-COVID-19 rise in retirements. Like many of their private sector counterparts, public employers are struggling to recruit and retain effective workforces in the wake of the pandemic’s economic impacts and a highly competitive labor market. Although there is scant evidence to support claims that retirement benefits a playing any factor whatsoever in worker retention decisions, especially for workers early in their professional careers, policymakers often try to influence employee decisions via retirement benefit policy because they may view it as the easiest carrot, in part due to the deferred cost of retirement benefits.
One example of the clearest examples of using retirement benefits as a carrot this session is State Sen. Jay Morris’ idea to give members of the TRSL Optional Retirement Plan (ORP), who previously made an irrevocable election to join the ORP, the right to revoke that irrevocable election and become participants in the TRSL defined benefit plan. Although ORP members would be responsible for the initial cost of TRSL credits, state actuaries warn that “comparatively generous assumptions” will undercalculate the final cost of each transfer.
Claims that the bill is cost neutral with respect to changes in TRSL’s unfunded accrued liability were also debunked by state actuaries. In the actual note, actuaries said the passage of Senate Bill 10 “results in an ORP member being able to purchase guaranteed benefits (e.g. a retirement annuity, disability, and death benefits, all guaranteed by TRSL and backed by the State of Louisiana) at a price that is significantly less than the cost of similar benefits on the open market.”
Similar bills have popped up around the country using similar arguments. For example, the Alaska State House recently passed a measure allowing transferees to move from their defined contribution plan to a defined benefit plan. The unknown cost and minimal actuarial scrutiny given to the Alaska measure, including the lack of long-term forecasting and stress testing, mirrors the level of review given to SB 10 to date. If market outcomes diverge from TRSL assumptions, the funds transferred will end up being inadequate to provide the promised pension benefits and responsibility for the shortfall will once again fall to taxpayers.
State Sen. Price and State Rep. Bacala introduced a major overhaul to LASERS addressing the fact that only 2.5% of new hires joining LASERS at age 35 will receive full, unreduced retirement benefits. Over two-thirds of LASERS members will leave public employment with only their contributions refunded, leaving more and more Louisianans without Social Security and very little savings for retirement. The new LASERS-specific plan intends to provide non-career members a better means to build their own retirement nest eggs by offering a traditional predefined retirement benefit combined with contributions toward individual retirement accounts. However, as proposed, the measure offers lower individual retirement account contributions than other similar hybrid systems in favor of higher than standard predefined benefits. For the vast majority of LASERS members, the hybrid approach would be an improvement over the current retirement benefit, but the reform falls short in other critical areas. Unfortunately, the hybrid structure being proposed in this legislation not only lacks the technical reforms needed to address the LASERS benefit gap, but it also leaves the state with as much risk going forward, if not more.
Beyond those two major issues, State Rep. Bacala also introduced a measure that would allow retired members of the Municipal Police Employees’ Retirement System to essentially come out of retirement and accrue additional pension benefits while they are already collecting pension benefits. State Rep. John Illg introduced a similar measure covering the District Attorneys’ Retirement System (DARS) retirees, while a proposal from State Reps. Larry Frieman and Rick Edmonds want to allow teachers to return to work without a suspension or reduction of their retirement benefits.
On a similar note, a number of legislators are attempting to increase the compensation for retirees returning to public employment. State Rep. Lance Harris wants to repeal a required benefit suspension for retirees who are reemployed in certain positions in MPERS, while State Rep. Troy Romero wants to increase the amount a retired teacher may earn while reemployed without a reduction of retirement benefits. State Rep. Phillip DeVillier wants to take a more direct approach and open the LASERS Hazardous Duty Service Plan to certain employees of the state fire marshal’s office not eligible for benefits.
Pension Fund Investment Activism
The third trend in pension legislation identified by the Pension Integrity Project at Reason Foundation in the 2022 regular session deals with activism in public pension fund investing. Nearly every state lawmaker has heard at least one call for their respective state to divest from Russian assets in the past weeks. Both the American Federation of Teachers and the American Federation of State, County and Municipal Employees (AFSCME) are urging their pension trustee members to immediately review public pension systems’ investments with ties to Russia following the country’s invasion of Ukraine.
Calls for activism through public pension fund investments are not new. Even Louisiana Attorney General Jeff Landry recently sent a letter to Louisiana State Treasurer John Schroder asking him to follow the lead of West Virginia State Treasurer Riley Moore, who announced his state would no longer invest with BlackRock, Inc., which has been under fire from Republicans since its CEO talked of “decarbonizing the global economy”
“Divesting from entire sectors – or simply passing carbon-intensive assets from public markets to private markets – will not get the world to net zero. And BlackRock does not pursue divestment from oil and gas companies as a policy. We do have some clients who choose to divest their assets while other clients reject that approach. Foresighted companies across a wide range of carbon-intensive sectors are transforming their businesses, and their actions are a critical part of decarbonization. We believe the companies leading the transition present a vital investment opportunity for our clients and driving capital towards these phoenixes will be essential to achieving a net-zero world.” Blackrock CEO Larry Fink wrote:
“Based on nothing more than a political calculation, many of these calls for divestment run afoul of fiduciary obligations and veer from the primary purpose of public pension systems. These divestment calls would leverage retirement benefits to achieve political goals. As honorable as it is to want assurances that public dollars are not being used to support authoritarian regimes, the complicated global investment strategies propping up these public pension systems make achieving those goals through legislation detrimental to the financial health of these important systems.”
Other Retirement Bills Worth Mentioning
Outside of the national public pension trends that have already made their way to the Louisiana legislature, a few other of the state’s standalone measures related to pensions are worth exploring briefly.
State Reps. Richard Nelson and Phillip Tarver both offered constitutional amendments requiring a minimum of 50% of all nonrecurring state revenues to be applied to the debt being serviced by Louisiana’s public pension systems. The process by which the infusion is deposited and the impact those transfers would have on the state’s financial health is unclear, but any supplemental appropriation to underfunded pension systems protects retiree benefits and saves taxpayers from costly interest payments on unfunded liabilities.
Louisiana State House Appropriations Committee Chairman Jerome Zeringue also introduced a supplemental funding measure that would appropriate more than $69 million in additional state general funds from nonrecurring revenue.
Although previous experience would dictate that many of these measures now under consideration by lawmakers in Baton Rouge are not likely to make it through this session, each touches the financial security of thousands of Louisianians—public workers in the retirement systems and the taxpayers funding them. Like almost everything being considered this session, these bills come with costs and trade-offs that put millions of taxpayer dollars on the line.
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