The interactive map below shows the funded ratios for state-managed public pension systems from 2001 to 2022. A funded ratio is calculated by dividing the value of a pension plan’s assets by the projected amount needed to cover the retirement benefits already promised to workers. The funded ratio values for 2022 are projections based on a -6% investment return. 

Year-to-year changes in investment returns and funded ratios tend to grab attention, but longer-range trends give a better perspective of the overall health of public pension systems.

In 2001, only one state, West Virginia, had an aggregated funded ratio of less than 60%. By the end of 2021, four states—Illinois, Kentucky, New Jersey, and Connecticut—had aggregate funded ratios below 60%.

If investment returns are -6% or worse in the 2022 fiscal year, Reason Foundation’s analysis shows South Carolina would be the fifth state with a funded ratio below 60%. 

Over the same period, 2001 to 2021, the number of states with state-managed pensions with funded ratios above 90% fell from 33 to 20. If all plans return a -6% investment return assumption for 2022, Reason Foundation projects the number of states that have funded levels above 90% would shrink from 20 to six.  The six states with funded levels that would still be above 90% after -6% returns for 2022: Delaware, Nebraska, New York, South Dakota, Washington, and Wisconsin. 

Importantly, the -6% investment return assumption for the 2022 fiscal year used in this map may be too optimistic for some public pension plans. The S&P 500 lost 12% of its value over the 2022 fiscal year from July 1, 2021, to June 30, 2022. Vanguard’s VBIAX, which mimics a typical 60/40 stock-bond portfolio, was down 15% for the fiscal 2022 year ending in June 30, 2022. Thus, given the condition of financial markets this year, the public pension plans with fiscal years that ended in June 2022 are likely to report negative returns for the 2022 fiscal year.  

Another useful long-term trend to look at are the unfunded liabilities of state-run pension plans. Whereas a pension system’s funded ratio takes the ratio of assets to liabilities, unfunded liabilities are the actual difference between the pension plan’s assets and liabilities. Unfunded liabilities can be conceptualized as the pension benefits already promised to workers that are not currently funded by the plan. Again, the values for the 2022 unfunded liabilities map are a projection using an investment return of -6%. 

The five states with the largest unfunded liabilities are California, Illinois, New Jersey, Pennsylvania, and Texas. In fiscal year 2021, the unfunded liabilities of those states totaled $434 billion and would jump to $620 billion in 2022 with a -6% return.  

For more information on the unfunded liabilities and funded ratios of state-run pensions, please visit Reason’s 2022 Public Pension Forecaster.

Notes

ⁱ The state-funded ratios in this map were generated by aggregating (for state-managed plans) the market value of plan assets and actuarially accrued liabilities. Prior to 2002, Montana and North Carolina reported data every two years, therefore for 2001 figures from 2002 are used. Figures for Washington state do not include Plan 1, an older plan that is not as well funded.

ⁱⁱ The discount rate applied to plan liabilities will impact the funded ratio of a plan. Therefore, the map above can be best thought of as a snapshot of state-funded ratios based on plan assumptions by year. Overly optimistic assumptions about a pension plan’s investment returns will result in artificially high-funded states. Conversely, pulling assumptions downward, while prudent, will result in a worse-looking funded ratio over the short term.

ⁱⁱⁱ In addition to projections for fiscal 2022, some public pension plans in 29 states have yet to report their complete fiscal 2021 figures and therefore include a projection estimate for 2021 as well. Thus, 2021 projections were used for at least one plan in the following states: Alabama, Alaska, Arkansas, California, Colorado, Georgia, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Missouri, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Texas, Tennessee, Utah, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.

The post Projecting the funded ratios of state-managed pension plans appeared first on Reason Foundation.

Based on a -6% return for fiscal 2022, the aggregate unfunded liability of state-run public pension plans will be $1.3 trillion, up from $783 billion in 2021, the Pension Integrity Project finds. With a -6% return in 2022, the aggregate funded ratio for these state pension plans would fall from 85% funded in 2021 to 75% funded in 2022. 

The 2022 Public Pension Forecaster below allows you to preview changes in public pension system funding measurements for major state-run pension plans. It allows you to select any potential 2022 investment return rate to see how the returns would impact the unfunded liabilities and funded status of these state pension plans on a market value of assets basis.

The nation’s largest public pension system, the California Public Employees’ Retirement System (CalPERS), provides a good example of how much one bad year of investment returns can significantly impact unfunded liabilities, public employees, and taxpayers.

If CalPERS’ investment returns come in at -6% for 2022, the system’s unfunded liabilities will increase from $101 billion in 2021 to $159 billion in 2022, a debt that would equal $4,057 for every Californian. Its funded ratio will drop from 82.5% in 2021 to 73.6% in 2022, meaning state employers will have less than three-quarters of the assets needed to pay for pensions already promised to workers. 

Similarly, the Teacher Retirement System of Texas (TRS) reported $26 billion in unfunded liabilities in 2021. If TRS posts annual returns of -6% for the fiscal year 2022, its unfunded liabilities will jump to $40 billion, and its funded ratio will drop to 83.4%. The unfunded liability per capita is estimated to be $1,338. 

The table below displays the estimated unfunded liabilities and the funded ratios for each state if their public pension systems report -6% or -12% returns for 2022. 

Estimated Changes to State Pension Unfunded Liabilties, Funded Ratios

The first three quarters of the 2022 fiscal year clocked in at 0%, 3.2%, and -3.4% for public pensions, according to Milliman. The S&P 500 is down more than 20% since January, suggesting that the fourth quarter results will be more bad news for pension investments.

Considering the average pension plan bases its ability to fund promised benefits on averaging 7% annual investment returns over the long term, plan managers are preparing for significant growth in unfunded liabilities, and a major step back in funding from 2021. 

The significant levels of volatility and funding challenges pension plans are experiencing right now support the Pension Integrity Project’s position last year that most state and local government pensions are still in need of reform, despite the strong investment returns and funding improvements in 2021. Unfortunately, many observers mistook a single good year of returns—granted a historic one—as a sign of stabilization in what was a bumpy couple of decades for public pension funding. On the contrary, this year’s returns, as well as the growing signs of a possible recession, lend credence to the belief that public pension systems should lower their return expectations and view investment markets as less predictable and more volatile. 

State pension plans, in aggregate, have struggled to reduce unfunded liabilities to below $1 trillion ever since the Great Recession, seeing this number climb to nearly $1.4 trillion in 2020. Great results from 2021 seemed to finally break this barrier, with the year’s historically positive investment returns reducing state pension debt to about $783 billion. Now, state-run pension plans will again see unfunded liabilities jump back over $1 trillion, assuming final 2022 results end up at or below 0%. 

It is important not to read too much into one year of investment results when it comes to long-term investing. But during this time of economic volatility, policymakers and stakeholders should recognize that many of the problems that kept public pension systems significantly underfunded for multiple decades still exist. And many pension plans are nearly as vulnerable to financial shocks as they were in the past.

Going forward, state and local leaders should continue to seek out ways to address and minimize these risks, making their public retirement systems more resilient to an uncertain future. 

Webinar on using the 2022 Public Pension Forecaster:

The post Unfunded public pension liabilities are forecast to rise to $1.3 trillion in 2022 appeared first on Reason Foundation.

In This Issue:

Articles, Research & Spotlights 

• Louisiana’s Hybrid Pension Proposal Falls Short
• Shortcomings of ESG Scores
• A Chance for New Hampshire to Reduce Pension Debt
• Texas Needs to Reform Teacher Pensions
• Past Pension Missteps Should Be a Warning to California

News in Brief
Quotable Quotes on Pension Reform
Data Highlight
Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Evaluating the Potential Impacts of Louisiana Senate Bill 438 

Recognizing the need to better accommodate an increasingly mobile workforce, Louisiana legislators are considering a proposal to create a hybrid pension plan for new workers in the Louisiana State Employees’ Retirement System (LASERS). Senate Bill 438 would place all new hires into a plan that combines a risk-reducing individual investment account with a defined benefit pension structure. Despite the bill’s intentions, Reason’s analysis and testimony find that the structure of the new plan would offer little risk mitigation, add costs, and be a poor fit for the modern worker. 

The Difficulties of Assigning ESG Ratings

Despite concerns with fiduciary priorities, an increasing number of public pension plans are applying environmental, social, and corporate governance (ESG) policies to their investment strategies. A major part of this trend is the emergence of ESG ratings that attempt to quantify the environmental impact of companies. In an examination of this scoring, Reason’s Jordan Campbell finds companies with a higher market capitalization tend to receive better ratings, raising some questions about the validity of ESG scoring. Do bigger companies truly have a lower impact on the environment, or are they just better equipped to comply with demanding reporting requirements?

Why Paying Down New Hampshire Pension Debt Faster Would Be a Win for Taxpayers 

New Hampshire’s state government holds over $800 million in unfunded pension obligations to public workers and retirees, but lawmakers have an opportunity to significantly reduce this costly debt. With state government revenues currently $382 million above expectations, policymakers should consider using this surplus to close the funding gap of its retirement system to reduce long-term costs and risks to taxpayers. The Pension Integrity Project’s new one-page explainer outlines the benefits of paying down New Hampshire’s pension debt sooner rather than later.

Teacher Retirement System of Texas Can Improve Funding Policies and Plan Design to Benefit Taxpayers, Employees 

Texas policymakers have adopted several major reforms to improve funding and reduce runaway costs associated with the state’s pension plans in recent years. Most notably, 2021 legislation adopted an improved funding policy and established a risk-managed retirement plan for all new workers in the Employee Retirement System (ERS). Now, as Reason’s Steven Gassenberger testified to the State Senate Committee on Finance, Texas policymakers need to make similar reforms to the Teacher Retirement System (TRS), which is still chronically underfunded and remains very vulnerable to overly optimistic market assumptions. TRS benefit offerings also need to expand to better serve the mobile nature of educators today.

California Should Learn from Past Mistakes Made with Unfunded Pension Benefit Increases 

California Senate Bill 868 would increase pension benefits for teachers who retired over 20 years ago. The bill aims to counteract the degrading effects that inflation has had on retirees’ pension benefits, but as Reason’s Marc Joffe warns, this benefit increase would come with a high price tag. The pension plan’s actuaries indicate that the move would cost the state $592 million, but this estimation could be too low because it depends on the plan achieving optimistic returns over the next few decades. The proposal would also add to California’s unfortunate history of giving out pension benefit increases without properly funding them, which has generated significant unexpected costs to public employers and taxpayers.

News in Brief

Forensic Analysis of Pension Funding: A tool for Policymakers

A new study conducted by Boston College’s Center for Retirement Research (CRR) looks at the role legacy debt plays in the solvency of pension plans in Illinois, Massachusetts, Pennsylvania, Ohio, and Rhode Island. The inception of many public pensions occurred in the early to mid 1900s and there were not the same established norms in funding practices that we see today. Many pension plans had a “pay-go” system where the funding for benefits was not saved in advance. Even those that used an actuarial funding method approached unfunded liabilities very differently, not always including legacy debt as part of the calculation for required contributions. These old funding policies, combined with underperforming investment returns and benefit increases during the 1980s and 1990s, have resulted in several plans holding significant unfunded liabilities that accrued more than half a century ago. On average, CRR reports that legacy debt is 40% of total unfunded liabilities for the five focus states, with some as high as 74% in the case of Ohio. The full brief is available here.

Quotable Quotes on Pension Reform 

“We have a lot of counties and cities that are struggling right now with inflationary costs, and every time the plan doesn’t perform, they have to put in more money.”

— North Carolina Treasurer Dale Folwell in “Pensions’ Bad Year Poised to Get Worse,” The Wall Street Journal, May 10, 2022

“Ultimately at a fiduciary level, if a pension fund’s total worst-case exposure to all earnings and income derived from autocratic nations is an insignificant fraction of its total portfolio, the composite risk is probably not worth losing sleep over, on purely financial grounds. But politics could still enter the theater stage for pension boards that ignore this issue”

– Former GASB board member and ICMA Retirement Corp. President Girard Miller in “Public Pensions’ New Quandary: Coping With Geopolitical Turmoil,” Governing, May 10, 2022

Data Highlight

Each month we feature a pension-related chart or infographic of interest generated by our team of Pension Integrity Project analysts. This month, analyst Jordan Campbell created a visualization of ESG risk ratings for the nation’s largest companies, showing the difference between the S&P 500 and the Russel 2000. 

Contact the Pension Reform Help Desk

Reason Foundation’s Pension Reform Help Desk provides information on Reason’s work on pension reform and resources for those wishing to pursue pension reform in their states, counties, and cities. Feel free to contact the Reason Pension Reform Help Desk by e-mail at pensionhelpdesk@reason.org. 

Follow the discussion on pensions and other governmental reforms at Reason Foundation’s website and on Twitter @ReasonPensions. As we continually strive to improve the publication, please feel free to send your questions, comments, and suggestions to zachary.christensen@reason.org.

The post Pension Reform News: Hybrid pension proposal falls short in Louisiana, shortcomings of ESG scores, and more appeared first on Reason Foundation.

A version of this testimony was given to the Louisiana Senate Committee on Retirement on April 25, 2022.

Thank you for the opportunity to share our project’s perspective on Senate Bill 438 (SB 438) and the proposed new hybrid retirement benefit under the Louisiana State Employees’ Retirement System (LASERS). 

My name is Ryan Frost, and I serve as a policy analyst for the Pension Integrity Project at Reason Foundation. Prior to joining Reason, I spent seven years as the research and policy manager for the Law Enforcement Officers and Firefighters Pension System in Washington state. Our team has engaged stakeholders in Louisiana dating back to 2016, offering quantitative research and pro-bono technical assistance to advance retirement security for public servants in a financially responsible way.  

Proposing an alternative benefit design to offer new public employees is commendable because even after the historic investment returns in 2021, LASERS is still only 66% funded with $6.8 billion in unfunded pension obligations. Although current amortization schedules are set to retire some of that debt, market forecasters also expect returns to be less than what LASERS actuaries assume across all asset classes. Lower returns would increase the probability of more unfunded liabilities in the near future.  

LASERS’ financial health aside, the plan’s current benefit structure is grossly inadequate for most public employees. Only 2.5% of new hires joining LASERS at age 35 will stay in the system long enough to accrue a full retirement benefit. Seventy percent of LASERS members leave with only their employee contributions to return to them (without interest). The current LASERS benefit is simply not designed for the modern public employee. These increasingly mobile employees are being penalized in Louisiana when leaving public employment. 

While previous attempts to implement a hybrid LASERS benefit—most notably back in 2018 under Senate Bill 14—would have addressed these issues, this current proposal includes changes that would likely prevent the state and taxpayers from seeing any meaningful cost reduction or financial risk reduction. 

Reason Foundation found that the use of a 1.8% multiplier (as outlined under the guaranteed benefit portion of the bill) would make LASERS an extreme outlier among hybrid plans. For example, the State Teachers Retirement System of Ohio whose members, like LASERS members, do not pay into Social Security operates using a 1% multiplier. Hybrid defined benefit (DB) and defined contribution (DC) designs typically use a 1.0%-1.25% multiplier for the guaranteed benefit and a more prominent defined contribution portion to broaden the number of members served by the plan. 

Another feature of this proposed plan that would be less than ideal for employees is the stipulation that hybrid members must annuitize their DC balances within LASERS. If a member separates from service for any reason (including retirement) and they want to withdraw their DC money in a lump sum, they are forced to also withdraw their DB contributions and forfeit any accrued pension benefit. They forfeit that benefit and all employer contributions made to the DB as well while gaining zero interest on any contributions made to the DB. 

No other hybrid plan has this stipulation. For a typical hybrid plan, if a member separates mid-career, they can take their DC money with them and leave their DB account alone. If a member separates at retirement–no matter what they choose to do with their DC balance–they may either receive their accrued pension or take a refund of all DB contributions (both employer and employee contributions plus interest). 

Adding this anomalous stipulation unduly jeopardizes members’ retirement security. Employees should be allowed to keep their DB benefit intact even if they withdraw their defined contribution benefit. In the end, the guaranteed benefit portion of the proposed hybrid plan slightly increases benefits for new hires while maintaining the same cost and risk challenges that led to LASERS’ current funding issues.  

While a new hybrid design for LASERS members could be a prudent step forward, Senate Bill 438, as currently drafted, lacks the risk and cost-saving mechanisms of other better-designed hybrid plans.  We commend legislators, members, and stakeholders willing to examine these important public pension issues and thank you again for the opportunity to share our perspective. 

The post Testimony: Louisiana Senate Bill 438 could cause public pension woes appeared first on Reason Foundation.

The post Evaluating the potential impacts of Louisiana Senate Bill 438 appeared first on Reason Foundation.

In this Issue:

Articles, Research & Spotlights 

• Alaska Needs to Answer Questions Before Jumping Back Into Defined Benefits
• Bills in Louisiana Would Weaken Public Retirement Systems
• Public Pension Investments Shouldn’t Be Guided by Politics
• New Reporting Standard Will Bring Valuable Perspective to Public Pensions
• Kansas Considers a Defined Contribution Plan

News in Brief
Quotable Quotes on Pension Reform
Data Highlight
Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Legislation Would Introduce Costs and Risks to Alaska Retirement System

After 15 years of new workers going into a defined contribution plan, Alaskan lawmakers are considering legislation that would change course. Alaska House Bill 55 would place all peace officers and firefighters into a new tier in the historically underfunded defined benefit plan. The potential reform has not undergone any sort of risk-focused, long-term actuarial analysis, but comments from the plan’s consulting actuary suggest that the move would expose the state to adverse funding and increased contribution rates. Reason Foundation’s Leonard Gilroy and Ryan Frost summarize what limited comments have emerged on the potential risks of House Bill 55 and list several questions that legislators should ask when considering such a significant policy shift. Chiefly among those questions is, What happens if the plan achieves investment returns below its lofty 7.38% return rate assumption?

Bills Under Consideration in Louisiana Would Increase, Not Decrease, Future Risks

Louisiana’s state legislature is currently considering several bills that would affect the state’s retirement systems, and the Pension Integrity Project has testified on several of these proposals before the Senate Committee on Retirement. Senate Bill 438 would establish a hybrid plan for the Louisiana State Employees’ Retirement System (LASERS), which would improve the accrual and portability of benefits for the majority of new hires. Three bills—Senate Bill 5, Senate Bill 6, and Senate Bill 7—seek to give out benefit adjustments for retirees, but involve funding policies that would weaken the state’s ability to manage unexpected costs in the future. Senate Bill 10 would allow current teachers who already made the choice to participate in the state’s defined contribution plan the option of changing their selection and entering the defined benefit pension. As Reason Foundation explains in this backgrounder, this move would do a disservice to Louisiana teachers and would weaken their already underfunded retirement system. 

Keeping Politics Out of Public Pension Investing

A growing trend in the sphere of public pensions is the push to use the trillions of dollars in pension assets, funded through taxpayer and member contributions, to support social and political interests. In this one-page backgrounder, Reason explains the problems with this politicized approach and why allowing objectives beyond a pension plan’s fiduciary responsibility reinforces risky behavior that can hurt the pension system, workers and taxpayers. This type of politicized investment policy also introduces several technical and unnecessary challenges for plan managers.

A Chance to Enter a New Era of Financial Transparency and Awareness for Public Pension Plans

The Actuarial Standards Board has issued a change to a previously adopted standard of practice (ASOP 4) that will now require public pension plans to report their obligations using alternate discounting. While plans will continue to report their liabilities using their current discounting methods, they will now also report these figures using discounting that is more appropriate for obligations that are backed by governments. Guest actuary commentator Larry Pollack explains that this new standard will provide a valuable perspective for understanding pension promises made and the risks involved in funding them.

Testimony: Assessing the Proposed Kansas Thrift Savings Plan

In the current legislative session, Kansas lawmakers are considering Senate Bill 553, which would establish a new defined contribution (DC) plan fashioned after the federal Thrift Savings Plan. The Pension Integrity Project at Reason Foundation testified before the Kansas Senate Committee on Assessment and Taxation on the legislation, offering its evaluation of the proposed DC plan. The assessment, which uses experience with similar plans around the country, indicates that the DC plan introduced in SB 553 would reflect best practices with adequate contributions, funding policies that would not take away from the existing pension, stated objectives, and options to provide lifetime income.

News in Brief

Analysis Finds Many Employers Fail to Adequately Replace Social Security Benefits

Most public pensions work in combination with Social Security, but some employers exercise the option to opt-out of the federal program, meaning they should compensate accordingly with higher contributions. A new report from the Center for Retirement Research at Boston College looks at whether state and local employees who are not covered by Social Security are receiving an equivalent benefit from their retirement plan. About five million state and local workers are not covered by Social Security, and 43% of those have lifetime benefits that fall short of what Social Security would have provided. The study does note that the difference between benefits does vary depending on years of service and those that leave mid-career suffer the greatest discrepancy. About one-third of non-covered workers fall into this tenure range of mid-career, which is between six-and-20 years of service. The full brief is available here.

Updated Brief Highlights Continued Reductions in Return Assumptions for Public Pensions

The National Association of State Retirement Administrators (NASRA) has released its latest brief on public pension plans’ assumed rates of return. They note that the two-decade trend in return assumption reductions is likely to continue. In 2018, the average assumed rate of return for a pension plan was 7.33%. By 2021 the assumed rate had dropped to 7%, with some states going even lower. The main driver of this trend is the declining interest rate environment after the 2008-09 recession, which caused returns for safer assets like treasuries to drop substantially. The brief notes short-term market forecasts are suggesting the next decade will likely render returns below historic averages, meaning plans will either face cost increases now through further reductions in assumptions or later through market experience coming in below expectations. The full brief is available here.

Quotable Quotes on Pension Reform 

“State pensions often have an allocation to equities that is greater than the size of [the states’] annual budgets, so a correction in equity prices can ultimately have an outsize impact on the state.” 

—Municipal Market Analytics partner Matt Fabian, cited in “U.S. Retirement Funds, Heavy on Stocks, Brace for Losses,” The Wall Street Journal, March 7, 2022

Contact the Pension Reform Help Desk

Reason Foundation’s Pension Reform Help Desk provides information on Reason’s work on pension reform and resources for those wishing to pursue pension reform in their states, counties, and cities. Feel free to contact the Reason Pension Reform Help Desk by e-mail at pensionhelpdesk@reason.org. 

Follow the discussion on pensions and other governmental reforms at Reason Foundation’s website and on Twitter @ReasonPensions. As we continually strive to improve the publication, please feel free to send your questions, comments, and suggestions to zachary.christensen@reason.org.

The post Pension Reform Newsletter: Bill endangers Alaska’s reforms, Louisiana bills would weaken retirement system, and more appeared first on Reason Foundation.

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.  

Cost-of-Living Increases

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 13^th 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 13^th check concept is not unique to Louisiana. In 2021, Texas lawmakers issued a 13^th 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 13^th 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 13^th 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 13^th 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 13^th 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.

The post Louisiana legislature considers several bills that would change public pensions and impact taxpayers appeared first on Reason Foundation.

Thank you for the opportunity to share our project’s perspective on Senate Bill 10 (SB10) and the proposal for allowing Optional Retirement Plan (ORP) participants to transfer their accrued liabilities to the Teachers’ Retirement System of Louisiana (TRSL).

My name is Steven Gassenberger, and I serve as a policy analyst for the Pension Integrity Project at Reason Foundation. Our team conducts quantitative public pension research and offers pro-bono technical assistance to officials and stakeholders aiming to improve pension resiliency and advance retirement security for public servants in a financially responsible way. 

Allowing ORP participants in higher education to revoke an irrevocable election they made upon entering the system, and transfer retirement liabilities to TRSL, contradicts the principles of sound pension funding and is likely to add to the system’s $9.3 billion in debt. 

The Legislative Auditor’s actuarial note makes clear SB10 is “likely not cost-neutral because the actuarial cost for the purchase is based on TRSL’s ‘comparatively generous assumptions’ and the “lack of individual underwriting that an insurance company would undertake.” 

The reason the proposed transfer of ORP funds creates a real risk of near-term TRSL unfunded liability increases lies in the system’s 7.25% assumed rate of investment return. Considering most state pension plans across the country are lowering their growth rate expectations down to, or below, 7%, any future investment underperformance—which capital market forecasts suggest is likely in the decade ahead—and/or adjustments to TRSL’s investment return assumptions will automatically create additional unfunded liabilities. 

Although the state auditor points out that this proposed change will cost more for state taxpayers, there is still no formal actuarial analysis, stress testing, or concrete reporting on exactly how much this added cost will be. Without a detailed analysis of the costs and financial risks that the state could incur under various investment outcomes, it is impossible to properly evaluate the merits of this proposed policy. 

Transferring ORP assets may not be a good deal for employees either. From the transferee’s perspective, ORP vendors may have investments with liquidity restrictions limiting the ability to comply with the 100% transfer requirement within the transfer window period. Other investments may also have early withdrawal reductions that affect the amount eligible for transfer. Even the timing of market conditions could lead to employees withdrawing their ORP at a low value.

SB10 is likely to shortchange members, increase the state’s pension debt, and weaken a TRSL system already burdened with $9.3 billion in unfunded but constitutionally protected retirement benefits.

We commend legislators, members, and stakeholders willing to examine these important issues and thank you again for the opportunity to share our perspective.

The post Testimony: Louisiana Senate Bill 10 is likely to increase pension debt and weaken retirement system appeared first on Reason Foundation.

Download Backgrounder: Senate Bill 10 Undermines TRSL Pension System

The post Senate Bill 10 undermines the Teacher Retirement System of Louisiana appeared first on Reason Foundation.

Thank you for the opportunity to share our project’s perspective on Senate Bill 7 (SB7) and issuing a permanent benefit increase to retirees and beneficiaries of the Louisiana State Police Retirement System (LSPRS).

My name is Steven Gassenberger, and I serve as a policy analyst for the Pension Integrity Project at Reason Foundation. Our team conducts quantitative public pension research and offers pro-bono technical assistance to officials and stakeholders aiming to improve pension resiliency and advance retirement security for public servants in a financially responsible way. 

While offering retirees some sort of inflation protection is commendable, especially when such a large part of the community relies solely on their fixed retirement income, the funding mechanism that SB7 would rely on is structurally flawed, financially questionable, and a national outlier in terms of providing inflation protection in a pension system.

The state currently relies on an experience account funding mechanism that skims what are deemed “excess” returns from the core pension fund. Those funds are then deposited into the system’s experience account to pay for permanent increases to members’ benefit or potentially one-time, so-called “13th check” bonuses. This is nothing like the typical inflation-based cost-of-living adjustments (COLAs) commonly used by U.S. public pension systems. The current process is also similar to a mechanism abandoned in recent years by the retirement systems for Arizona’s public safety employees, judges, and elected officials that was replaced with a simple, prefunded compounding COLA tied to real inflation trends.  This change was due to the resulting debt owed by taxpayers and ongoing financial risks posed by the skimming of investment returns. 

Skimming excess returns drastically alters the way a plan funds its benefits. Returns above the plans’ assumed rate of return are needed to offset years in which returns come in below what was assumed. The state structurally redirecting much-needed investment gains away from its underfunded pension systems—only to fund permanent benefit increases that increase liabilities—prevents plans from enjoying the full benefit of investment gains and weakens fund performance.

According to the state legislative auditor, this method of funding long-term pension obligations also “accelerates the patterns of future transfers expected to go into and out of the Experience Account, which results in an increase in expected future contributions to the plan.” 

Using experience account funds at this time triggers statutory rules that will lead to future transfers from the core pension fund into the experience account, and the timing could not be worse. Even after a historic bull market and 2021 returns, TRSL remains only 71% funded with $9.3 billion in debt. Given the expected market volatility ahead, reactivating experience account transfers out of the core pension would be counterproductive to furthering the system’s financial progress. The rules used to trigger the release of permanent benefit increases do not correspond at all to actual inflation in the economy, so the nature of the benefit itself is not particularly predictable or reliable for the recipients. 

As you consider this legislation, we believe it is important to keep in mind that the reason you are having this conversation at all is because the state’s current method of granting benefit increases does not work well for the state, public employees, or taxpayers.

We commend legislators, members, and stakeholders willing to examine these important issues and thank you again for the opportunity to share our perspective.

The post Testimony: Senate Bill 7 could weaken Louisiana State Police Retirement System appeared first on Reason Foundation.

Thank you for the opportunity to share our project’s perspective on Senate Bill 6 (SB6) and issuing a permanent benefit increase to retirees and beneficiaries of the Teachers’ Retirement System of Louisiana (TRSL).

My name is Steven Gassenberger, and I serve as a policy analyst for the Pension Integrity Project at Reason Foundation. Our team conducts quantitative public pension research and offers pro-bono technical assistance to officials and stakeholders aiming to improve pension resiliency and advance retirement security for public servants in a financially responsible way. 

While offering retirees some sort of inflation protection is commendable, especially when such a large part of the community relies solely on their fixed retirement income, the funding mechanism that SB6 would rely on is structurally flawed, financially questionable, and a national outlier in terms of providing inflation protection in a pension system. 

The state currently relies on an experience account funding mechanism that skims what are deemed “excess” returns from the core pension fund. Those funds are then deposited into the system’s experience account to pay for permanent increases to members’ benefit or a potentially one-time, so-called “13th check” bonuses. This is nothing like the typical inflation-based cost-of-living adjustments (COLAs) commonly used by U.S. public pension systems. The current process is also similar to a mechanism abandoned in recent years by the retirement systems used by Arizona’s public safety employees, judges, and elected officials that was replaced with a simple, prefunded compounding COLA tied to real inflation trends. This change was due to the resulting unfunded liabilities and ongoing financial risks posed by the skimming of investment returns. 

Skimming excess returns drastically alters the way a plan funds its benefits. Returns above the plans’ assumed rate of return are needed to offset years in which returns come in below what was assumed. The state structurally redirecting much-needed investment gains away from its underfunded pension systems—only to fund permanent benefit increases that increase liabilities—prevents plans from enjoying the full benefit of investment gains and weakens fund performance.

According to the state legislative auditor, this method of funding long-term pension obligations also “accelerates the patterns of future transfers expected to go into and out of the Experience Account, which results in an increase in expected future contributions to the plan.” 

Using experience account funds at this time triggers statutory rules that will lead to future transfers from the core pension fund into the experience account, and the timing could not be worse. Even after a historic bull market and 2021 returns, TRSL remains only 71% funded with $9.3 billion in debt. Given the expected market volatility ahead, reactivating experience account transfers out of the core pension would be counterproductive to furthering the system’s financial progress. The rules used to trigger the release of permanent benefit increases do not correspond to actual inflation in the economy, so the nature of the benefit itself is not particularly predictable or reliable for the recipients. 

As you consider this legislation, we believe it is important to keep in mind that the reason you are having this conversation at all is because the state’s current method of granting benefit increases does not work well for the state, public employees, or taxpayers.

We commend legislators, members, and stakeholders willing to examine these important issues and thank you again for the opportunity to share our perspective.

The post Testimony: Louisiana Senate Bill 6 relies on a structurally flawed funding mechanism appeared first on Reason Foundation.

Thank you for the opportunity to share our project’s perspective on Senate Bill 5 (SB5) and the potential one-time, lump-sum payment to retirees and beneficiaries of the Louisiana State Employees’ Retirement System (LASERS).

My name is Steven Gassenberger, and I serve as a policy analyst for the Pension Integrity Project at Reason Foundation. Our team conducts quantitative public pension research and offers pro-bono technical assistance to officials and stakeholders aiming to improve pension resiliency and advance retirement security for public servants in a financially responsible way. 

Unlike some of the other bills under consideration, SB5 providing a one-time bonus to beneficiaries is not expected to permanently increase future benefit payments. Offering retirees a bonus to protect the value of their earned benefit in a way that also protects the financial health of the LASERS system is a win-win for all stakeholders. However, the funding mechanism used to pay for the bonus leverages the entire balance of the system’s experience account, which is likely to undermine the claim that SB5 is a one-time cost.

The state currently relies on an experience account funding mechanism that skims what are deemed “excess” returns from the core pension fund. Those funds are then deposited into the system’s experience account to pay for permanent increases to the base benefit or potentially one-time, so-called “13th check” bonuses. This is nothing like the typical inflation-based cost-of-living adjustments (COLAs) commonly used by U.S. public pension systems. The current process is also similar to a mechanism abandoned in recent years by the retirement systems for Arizona’s public safety employees, judges, and elected officials retirement systems that was replaced with a simple, prefunded compounding COLA tied to real inflation trends. This change was due to the resulting unfunded liabilities and ongoing financial risks posed by the skimming of investment returns. 

Skimming excess returns drastically alters the way a plan funds its benefits. Returns above the plans assumed rate of return are needed to offset years in which returns come in below what was assumed. The state structurally redirecting much-needed investment gains away from its underfunded pension systems—only to fund permanent benefit increases that increase liabilities—prevents plans from enjoying the full benefit of investment gains and weakens fund performance.

According to the state legislative auditor, this method of funding long-term pension obligations  “accelerates the patterns of future transfers expected to go into and out of the Experience Account, which results in an increase in expected future contributions to the plan.”

Using experience account funds at this time triggers statutory rules that will lead to future transfers from the core pension fund into the experience account, and the timing could not be worse. Even after a historic bull market and 2021 returns, TRSL remains only 71% funded with $9.3 billion in debt. Given the expected market volatility ahead, reactivating experience account transfers out of the core pension would be counterproductive to furthering the system’s financial progress. The rules used to trigger the release of permanent benefit increases do not correspond to actual inflation in the economy, so the nature of the benefit itself is not particularly predictable or reliable for the recipients. 

As you consider this legislation, we believe it is also important to keep in mind that the reason you are having this conversation at all is because the state’s current method of granting benefit increases does not work well for the state or for taxpayers.

We commend legislators, members, and stakeholders willing to examine these important issues and thank you again for the opportunity to share our perspective.

The post Testimony: Louisiana Senate Bill 5’s bonus payment unlikely to be a one-time cost appeared first on Reason Foundation.

The post Keeping politics out of public pension investing appeared first on Reason Foundation.

Last year, 2021, was one such year. Last fiscal year, most public pension plans saw record-breaking investment returns. In 2022, these pension plans have the opportunity to update their investment return rate assumptions.

Discount rates are used to calculate pension costs, and the assumed rate of returns is used to project asset growth. It is often difficult and costly for pension plans to lower their discount rates and assumed rates of return because doing so causes the plan to recognize that investment returns will be lower in the future. Those lower market return projections mean the cost of funding pension benefits will increase elsewhere. Thus, lowering discount rates and assumed rates of return requires state and local governments to make up the difference between the rate they previously assumed investments would return and the new lower rate of returns. That difference means increased contributions from state and local budgets or higher contributions deducted from plan members’ salaries. 

The Pension Integrity Project’s analysis of the Louisiana State Employees Retirement System’s (LASERS) pension debt growth shows that changes to actuarial assumptions have increased how much the state must contribute to the plan to fund retiree benefits. Around $2.4 billion in previously unrecognized debt was revealed between 2000 and 2021 because of changes to investment return assumptions. While not all of this shortfall needs to be paid immediately, this has contributed to the plan’s growing annual costs.

Adjusting actuarial returns sooner rather than later can reduce long-term costs. For example, LASERS averaged a 7.1% compound investment return rate between 2000 and 2021. If the plan had reduced its return assumption closer to 7% immediately after the 2008 financial crisis, it would have increased state contributions to the fund each year, potentially avoiding the debt accrued between 2008 and 2021 when actual returns were falling below the plan’s assumed rate of return. Lowering investment return assumptions would have taken a larger portion of the state budget each year, but pre-funding public pension benefits in this way would have been less expensive than having to pay interest on the $2.4 billion that has been added to the fund’s total debt load as a result of overly optimistic investment return expectations. 

Last year, the LASERS Board slightly reduced the pension plan’s discount rate and return assumption from 7.55% to 7.4%. Incidentally, last year’s investment return of 31.48% translated into $273 million in asset growth. This figure almost exactly matches the $270 million it cost the plan to make the discount rate adjustment, providing a good example of how extra investment gains can help plans fund costly assumption changes and reduce the chance of adding more debt in the future.

Another great use of one year of outstanding investment revenue is paying down existing debt. Per Act 399 of 2014, LASERS appropriates the first $100 million (indexed annually by growth in actuarial assets) of excess returns toward paying down legacy debt). In 2021, LASERS allocated $117.4 million of the excess investment revenue (the actuarial asset return above the assumed rate) toward paying down its legacy debt. 

Per the same policy, however, 50% of the remaining excess revenue went to fund permanent benefit increases, which is an increase in benefits that is not properly pre-funded and arguably one of the worst parts of the plan’s pension funding policy.

Louisiana is not alone in taking action to reduce actuarial assumptions after a year of excellent investment performance. The California Public Employees’ Retirement System—the world’s largest public pension plan—is implementing a plan to lower its assumed return and discount rate from 7.0% to 6.8%, and many other state-managed plans are going below the 7.0% target and bumping up the inflow of annual contributions to brace for the expectation of lower long-term returns. The New York State Common Retirement Fund, the third-largest public pension plan in the U.S., has lowered its return rate target from 6.8% to 5.9% following a staggering 33.5% return in 2021. 

“We have a unique opportunity to better position the funds for the long term because of the outsized returns that we’ve had in the past year [2021],” New York State Comptroller Thomas DiNapoli told Bloomberg.

Lowering investment return assumptions and discount rates are also supported by recent market forecasts which show public pension plans are likely to achieve closer to 6.0% investment returns over the next 20 years.

It is wise for public pension systems to use a single year of impressive investment gains to better prepare their fund for the future. Lowering investment return rate assumptions can help reduce the risks of future shortfalls and ensure proper funding of retirement benefits for teachers and other public workers.

The post How public pension plans can use last year’s investment returns to reduce debt and future risk appeared first on Reason Foundation.

Still, the rebound in institutional returns is welcome after the economic dip and fears the world could be facing a long-term economic crisis when the COVID-19 pandemic hit last year. The S&P 500 index has gained a staggering 38 percent since July 2020, and all major indexes are on the upswing. This market performance will bolster the assets of most U.S. public pension systems and improve their funding in the short term.

The Center for Retirement Research at Boston College recently projected a two-basis point aggregate increase in the funded ratio for public pensions plans —from 72.8 percent funded in 2020 to 74.7 percent funded in 2021.

But retirees, taxpayers and policymakers should not get too excited yet.

Before the COVID-19 pandemic, the U.S. experienced its longest streak of economic growth in history, but during that time most public pension plans only made minor progress in improving their funding levels. In fact, many public pension plans’ funding got dramatically worse, which highlights one of the greatest challenges facing underfunded public pension plans—proper funding requires decades of hitting investment return goals, along with making sufficient pension contributions each year.

As many of these public pension plans struggle to significantly improve their funded ratios, it is becoming clear that they will not be able to simply invest their way out of their current shortfalls.

Take Louisiana’s pension plan for state employees for example. The Louisiana State Employees’ Retirement System (LASERS) had an average 7.7 percent return during the longest period of economic growth in US history between 2011 and 2020. But the return barely beat the plan’s assumed rate of return— 7.55 percent. In the longer term, the plan averaged just 5.7 percent over the last two decades, from 2001 to 2020. As a result of failing to meet overly optimistic investment return assumptions during that period, the pension system added around $3 billion in debt, bringing the plan’s total debt to $7.1 billion as of 2020. Investment shortfalls and overly optimistic assumed rates of return like this tend to be the largest culprits driving growing pension debt for state and local plans across the country.

Figure 1. Louisiana State Employees’ Retirement System: A History of Investment Returns (2001-2020)

Source: Pension Integrity Project analysis of plan’s valuation reports and comprehensive annual financial reports.

Although most public pension funds are seeing excellent investment returns this year, the economic prospects are less optimistic in the long run. As vaccinations increase and regions try to return to pre-pandemic activities, economies are facing a variety of risks, including rapid consumer price increases. Per the U.S. Bureau of Labor Statistics, for example, inflation in the United States increased by double digits in April and May. The Federal Reserve is also considering increasing interest rates by the end of 2023, which would likely slow real economic growth in the country.

Even before the COVID-19 crisis, financial experts were projecting a continuation of a lower-yield investment environment in the next 10-15 years. Revised economic expectations are even less optimistic right now. For example, J.P. Morgan’s recent Long-Term Capital Markets Assumptions report shows that they have lowered return expectations for U.S. stocks.

Simply put, public pension systems should view this year’s excellent investment returns as an outlier, not a norm. Once the current market rebound ends, most experts say the long-term funding prospects for state and local pension plans remain poor.

Public pension plans, on average, need to hit their return assumptions over a very long period to ensure the retirement benefits promised to teachers, law enforcement officers, and other public employees are fully funded and future taxpayers are not saddled with public pension debt. A single year of good investment returns, while quite welcome, is not a solid indicator that public plans that have struggled to improve their funding over the past two decades are now heading in the right long-term direction.

The post One Year of High Investment Returns Does Little to Improve Long-Term Public Pension Funding Levels appeared first on Reason Foundation.

Funded ratios are a simple and useful metric that can help to assess the financial health of a pension plan. Calculated by dividing the projected value of a pension plan’s assets by the cost of its promised pension benefits, funded ratios can reveal if a pension system is on track to be able to pay for the retirement benefits that have been promised to workers.

Over time, changes in a pension plan’s funded ratio, also referred to as a pension’s funded status, can show the rate at which the plan’s debt is growing.

In 2001, West Virginia was the only state where public pension plans had an aggregate funded ratio of less than 60 percent. However, 18 years later, in 2019, nine states faced aggregate funded ratios below 60 percent.

In that same time period, the number of states with funded ratios below 70 percent (but above 60 percent) grew from three to 14. Together, these numbers show that, as of 2019, 23 states had less than 70 percent of the assets on hand that they need to be able to pay for promised future retirement benefits.

Perhaps even more alarming is the fact that over the last two decades, the number of states with fully-funded pensions fell from 20 to just one. As of 2019, South Dakota was the only state without any public pension debt.

The interactive map below shows the change in each state’s aggregated pension plan funded ratio from 2001 to 2019. Because many states administer multiple public pension plans we combined the pension liabilities and actuarial value of assets of all the pension plans in a state to calculate their aggregate funded ratio for the data visualization.

We recommend viewing this interactive chart on a desktop for the best user experience.

Previous analysis has shown that the average state-level funded ratio, using the market value of assets, dropped from 97.7 percent in 2001 to roughly 73.6 percent in 2019. This decline of 24.1 percentage points is cause for concern for workers, taxpayers, and lawmakers.

As public pension debt grows, so does the cost of saving for retirement benefits. Public pension underfunding not only puts taxpayers on the hook for growing pension debt but could jeopardize the retirement security of teachers, public safety officials, and other state employees. Left unaddressed, pension debt will also continue to pull resources from other public priorities like road repairs and K-12 education in most states.

The post Public Pension Plans’ Funded Ratios Have Been Declining for Years appeared first on Reason Foundation.

The Louisiana State Employees’ Retirement System (LASERS) has seen a significant increase in public pension debt in the last two decades. With $7.1 billion in unfunded liabilities, the retirement security of Lousiana’s state workers and retirees may be in jeopardy.

Reason Foundation’s latest analysis, updated this month (November 2020), shows that deviations from investment return assumptions have been the largest contributor to the system’s unfunded liability growth, adding $2.7 billion to its unfunded liability since 2000. This growth in unfunded liabilities has driven benefit costs higher while crowding out other programs and priorities that may be clamoring for public funding in Louisiana.

The chart below, from the full solvency analysis, shows the increase in the Louisiana State Employees’ Retirement System debt since 2001:

Today, LASERS has only 64 percent of the assets needed to fully fund the pension system in the long-term. This underfunding not only puts taxpayers on the hook for growing debt but also jeopardizes the retirement security of Louisiana’s state employees. Left unaddressed, the Louisiana State Employees’ Retirement System’s structural problems will continue to resources from other state priorities.

The solvency analysis looks at the primary factors driving unfunded liabilities in LASERS’ over the past few decades and offers stress-testing designed to highlight potentially latent financial risks the pension system is facing. Reason Foundation also provides a number of policy suggestions that, if implemented, would address the declining solvency of the public pension plan. A new, updated analysis will be added to this page regularly to track the system’s performance and solvency.

Bringing stakeholders together around a central, non-partisan understanding of the challenges the Teacher Retirement System of Louisiana and the Louisiana State Employees’ Retirement System face—complete with independent third-party actuarial analysis and expert technical assistance—the Pension Integrity Project at Reason Foundation stands ready to help guide Louisiana policymakers and stakeholders in addressing the shifting fiscal landscape.

Louisiana State Employees’ Retirement System (LASRS) Pension Solvency Analysis

The post Louisiana State Employees’ Retirement System (LASERS) Pension Solvency Analysis appeared first on Reason Foundation.

The Teachers’ Retirement System of Louisiana (TRSL), the public pension plan serving educators in the state, is descending into insolvency and putting the retirement benefits of teachers at risk. In the year 2000, TRSL had just over $3 billion in public pension debt, and, in the two decades since, this number has risen dramatically. The latest, official numbers reveal that the Teachers’ Retirement System of Louisiana now has over $10 billion in unfunded pension liabilities.

Reason Foundation’s latest analysis, updated this month (October 2020), shows that the past two decades of underperforming investments, insufficient contributions, and a flawed process of issuing cost-of-living adjustments, has driven benefit costs higher while crowding out other programs and priorities that clamoring for public funding in Louisiana. In fact, investment returns failing to meet unrealistic expectations has been the largest contributor to the public pension plan’s unfunded liability growth, adding $4.2 billion since 2000.

The chart below, from the full solvency analysis, shows the dramatic increase in the Teachers’ Retirement System of Louisiana’s debt:

Today, TRSL has only 67 percent of the assets needed to fully fund the pension system in the long-term. This underfunding not only puts taxpayers on the hook for growing debt but also jeopardizes the retirement security of Louisiana’s educators. The pension debt also continues to pull funding away from Louisiana classrooms and teachers’ salaries.

Left unaddressed, TRSL’s structural problems will lead to more education funding crowd out, more debt for future generations, and less retirement security for the state’s educators.

The solvency analysis looks at the primary factors driving unfunded liabilities in TRSL over the past few decades and offers stress-testing designed to highlight potentially latent financial risks the pension system is facing. Reason Foundation also provides a number of policy suggestions that, if implemented, would address the declining solvency of the public pension plan. A new, updated analysis will be added to this page regularly to track TRSL’s performance and solvency.

Bringing stakeholders together around a central, non-partisan understanding of the challenges TRSL faces—complete with independent third-party actuarial analysis and expert technical assistance—Reason Foundation’s Pension Integrity Project stands ready to help guide Louisiana policymakers and stakeholders in addressing the shifting fiscal landscape.

Teacher Retirement System of Louisiana (TRSL) Pension Solvency Analysis 

Reason Foundation’s previous solvency analysis of the Teachers’ Retirement System of Louisiana (TRSL) is available here:

• 2019 Teacher Retirement System of Louisiana Solvency Analysis

The post Teachers’ Retirement System of Louisiana Pension Solvency Analysis appeared first on Reason Foundation.

Long before the COVID-19 pandemic disrupted financial markets, public pension plans’ investments were underperforming expectations with regularity. Across-the-board investment underperformance relative to a plan’s assumed rate of investment return has been the primary culprit of the nation’s growing pension debt. Even before the recent economic downturn, it was clear this lower yield, higher risk environment should be considered the “new normal” in public pension investment returns and that plans like the Teachers’ Retirement System of Louisiana need to adjust.

Our updated analysis recently published by the Pension Integrity Project at Reason Foundation found investment underperformance over the past 20 years accounts for over 50 percent of the $6.3 billion worth of unfunded liabilities plaguing the Teachers’ Retirement System of Louisiana (TRSL). Another roughly 10-to-15 percent of unfunded liabilities come from negative amortization — annual pension contributions failing to cover even the interest payments on past pension debt.

According to 2019 capital market assumptions done by Horizon Actuarial Services, TRSL had less than a 40 percent chance of achieving investment returns at, or above, its 2019 target rate of 7.55 percent. And the plan has only a 55 percent chance of reaching that threshold over the next 20 years — and those were the odds before the market downturn of March 2020.

When public pension systems fail to meet their investment return targets, it piles debt onto an already underfunded retirement system.

Lower investment yields also mean that most public plans are going to assume increasing risks to try and maintain their higher target return rate assumptions. In 1996, TRSL investment volatility stood at just 9 percent. Based on 2019 capital assumptions, TRSL is likely to experience roughly 12 percent year-over-year volatility in portfolio returns in the next 10 to 20 years. It is clear that in response to underperformance, Louisiana plan investors are welcoming higher risk.

Although the long-term economic effects of COVID-19 remain unclear, the “new normal” analysis of the previous decade’s recession gives a glimpse at the fate many public pension plans face after the pandemic.

After the financial crash of 2007-08, several state pension systems—including pension plans in Kentucky, Connecticut, Illinois, and New Jersey—were so underfunded that even the longest economic recovery in history, over a decade of economic growth, did not appear to help them dig out of their deep underfunding trenches. Now that the bull market has come to a grinding halt, it is more important than ever to adjust target rates and avoid further insolvency.

Policymakers should be proud that the tough decisions they made over the past several sessions to fill the multibillion-dollar state budget hole has better prepared Louisiana for the COVID-19 crisis. But they again face serious state and local budget problems, including questions regarding the long-term solvency of TRSL.

A changing investment reality and the “new normal” for pension plans is here. For Louisiana, the new normal means it is time to take proactive steps to secure the pensions that have been promised to workers and to get TRSL in a financial position that allows it to better weather the fiscal storm we’re entering.

The post Failing to Meet Investment Expectations Drives the Teachers’ Retirement System of Louisiana Debt appeared first on Reason Foundation.

Any time annual investment returns fall below the assumed rate of return (ARR), a plan must find ways to make up the shortfall between expected and actual assets. Sustained experience below a plan’s ARR results in growing pension debt, which has been a significant contributor to the funding shortfalls in public pension plans across the nation.

In response to decades of investment performance below expectations, most public pension plans have been gradually adjusting their assumed rates of return down to more realistic levels.

This map (click to zoom) shows the changes in assumed rates of return held by state pension systems from 2001 to 2018, along with the national average rate for comparative purposes. And this visualization highlights the different ways states have responded to the ubiquitous challenge of lower long-term returns. [Note: for cases of states with multiple public pension plans, the analysis uses each plan’s accrued liability to weight the state’s combined assumed rate of return.]

As an example, North Carolina lowered its ARR well before most other states. As a result, they experienced fewer unexpected costs over the studied timeframe, which helped them become one of the nation’s healthiest states in pension funding — with a 90 percent funded ratio at this time.

Colorado, on the other hand, was slow to adjust its ARR. Market returns below the state’s expectations were the largest contributor to Colorado’s pension debt over the past two decades, adding $8.4 billion in unexpected costs. Now, the state only has 60 percent of the funding needed to cover the retirement promises already made to its public servants.

States have been lowering their assumed rates of return across the board, but most maintain assumptions that are still too high. Many financial advisors believe that investors can expect to see continued overall investment performance that is below the levels experienced in the past. With this in mind—and the unignorably turbulent market results as of late—state policymakers should consider reducing the risk of future pension debt accrual by lowering their ARR even further.

The sooner government pension plans adopt more conservative return assumptions, the better off they will be down the road. More importantly, acting early can help ensure that promised pension benefits will be available for their public workers.

Map: State Pension Plans’ Assumed Rates of Return 2001-2018 (png)

Map: State Pension Plans’ Assumed Rates of Return 2001-2018 

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