The state should ensure that excessive resources are not committed to funding teachers' pension systems.
As of June 30, 2015, the most recent date for which an actuarial valuation is available, Louisiana's pension system for teachers is 56.4 percent funded, an increase of 4.5 percentage points since NCTQ's last report. Its current pension debt is nearly $16,000 per pupil throughout the state. It also has amortization periods of 30 years or less for each of its different schedules. This means that if the plan earns its assumed rate of return of 8 percent and makes its full actuarially determined contribution payments, it would take the state no more than 30 years to pay off various portions of its unfunded liabilities. While its amortization period meets requirements, Louisiana's funding level is too low. The state's system is not financially sustainable according to actuarial benchmarks.
In addition, Louisiana commits excessive resources toward its teachers' retirement system. The current total employer contribution rate of 25.5 percent for 2016-17 is too high. The rate is determined according to statutory requirements, which mandate that the employer contribution rate must equal the cost to fund this year's expenses (the normal cost) plus any amount needed to amortize any unfunded liabilities over various specified time periods. While this rate allows the state to pay off liabilities within the required 30-year period, it does so at a high cost, precluding Louisiana from spending those funds on other more immediate means to retain talented teachers. The mandatory employee contribution rate of 8 percent is reasonable given that teachers are not also required to contribute to Social Security.
Louisiana Teachers' Retirement System, Actuarial Valuation Report as of June 30, 2015.
Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded to allow more protection during financial downturns. However, Louisiana should consider ways to improve its funding level without raising the contributions of school districts and teachers. In fact, the state should work to decrease employer contributions. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention. Improving funding levels necessitates, in part, systemic changes in the state's pension system. The goals on pension flexibility and pension neutrality provide suggestions for pension system structures that are both sustainable and fair.
Louisiana asserted that it has taken a number of important steps since the late 1980s to ensure its teacher retirement plan is sustainable. In 1987, Louisiana, through a constitutional amendment, addressed the payment of TRSL's unfunded accrued liability (UAL) resulting from the granting of benefits and increases in benefits without funding in previous years. The system is required to be actuarially sound with a payment plan for eliminating the UAL.
In FY 2009 (ACT 497), FY 2014 (Act 399), and again in FY 2016 (Act 95), the Louisiana legislature enacted pension reform measures that address amortization of debt, the increased application of excess investment earnings to the UAL, and the amount and frequency of future cost-of-living adjustments. The result is that more funding is being applied to pay down system debt and keep employer contributions more level.
Other important legislative reforms to address sustainability and employer contributions include:
In 2007, a constitutional amendment provided that no new benefit provision can be created if such provision has an actuarial cost, unless a funding source sufficient to pay all actuarial costs within 10 years is identified.
In 2010, a constitutional amendment requires that any retirement benefit provision having an actuarial cost must be passed by two-thirds of the members of the legislature. Act 992 increased the retirement eligibility age for all new hires on or after January 1, 2011, to age 60 and established a final average compensation calculation of five years rather than three years. And, Act 921 restricted TRSL's retirees' ability to return to work without a benefit suspension.
In 2011, the Louisiana legislature passed a constitutional amendment related to the payment of surplus state funds toward TRSL's UAL.
In 2014, Act 226 increased the retirement eligibility age to 62 for new employees hired on or after July 1, 2015. Act 571 switched TRSL's cost method from Projected Unit Credit (PUC) to Entry Age Normal (EAN). The EAN will ensure more level normal costs and contribution requirements as demographics of members change.
Louisiana added "the good news is that these reforms are working." TRSL's funding status has steadily increased from 57.4% in FY 2014 to 60.9% in FY 2015 and to 62.4% in FY 2016.
With regard to the conclusion that the funding level is too low, a 2008 American Academy of Actuaries Issue Brief: The 80% Pension Funding Standard Myth states that that "no single level of funding should be identified as a defining line between a 'healthy' and an 'unhealthy' pension plan." If the plan's actuarial funding method has a built-in mechanism for moving the plan toward the target of 100% funding and the financial means and commitment to make the necessary contributions, "a particular funded ratio does not necessarily represent a significant problem." Louisiana has such a plan in place and is making the required payments even in tough financial times.
Projected employer contributions have decreased by $68 million since FY 2014. In comparison to Social Security employer contributions, TRSL employers are paying considerably less toward the normal cost of retirement - 1.97% less in FY 2016 and 2.03% less in FY 2017. (TRSL's aggregate normal cost contribution rate was 4.23% in FY 2016 and 4.17% in FY 2017; the Social Security employer share has remained 6.2%.) TRSL's employee contribution rate has remained steady at 8% since 1987.
Additionally, in an August 2015 presentation to the state's Public Retirement Systems' Actuarial Committee, the Louisiana Legislative Auditor described TRSL's current defined benefit plan structure for existing and new active members as "definitely sustainable." In fact, a recent analysis of state public pension plans by the PEW Charitable Trust and the analysis in Governing magazine show that Louisiana's pension plans are among the top five plans in the best shape across the country.
A system that is only 60 percent funded is not financially "healthy" and does not meet recommended benchmarks. While the state has taken critical steps to reduce unfunded liabilities, they still do not alter the basis of the system.
Individual taxpayers and current teachers through rate increases are paying the bills of teacher pension systems that were not prepared for financial downturns. In Louisiana, and in other states, teachers' current mandatory contribution rate is greater than the annual cost to provide benefits promised to them (normal cost). In fact, the state's response notes that the current normal cost is 5.04 percent, or 3 percentage points below teachers' current contributions, and is less than 20 percent of the total percentage (27.7) contributed to the system this year. The systems that are in place to provide benefits are leveraging their mandatory membership and mandatory contribution rates to pay for previous underfunding. Current teachers have higher contribution rates and lower benefits than previous generations. This may be a responsible measure on the part of the pension system to create a more financially sustainable plan, but it is also unfair to current teachers whom the system is supposed to be representing. While it is arguable whether this is detrimental to retention of current teachers, this situation will certainly not help to attract new teachers.