Pension Sustainability: Louisiana

2011 Retaining Effective Teachers Policy

Goal

The state should ensure that excessive resources are not committed to funding teachers' pension systems.

Meets a small part
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Sustainability: Louisiana results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/LA-Pension-Sustainability-9

Analysis of Louisiana's policies

As of June 30, 2010, the most recent date for which an actuarial valuation is available, Louisiana's pension system for teachers is 54.4 percent funded and has amortization periods of less than 30 years for each of its different accounts. This means that if the plan earns its assumed rate of return and maintains current contribution rates, it would take the state less 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 employer contribution rate of 23.7 percent 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 great 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.

Citation

Recommendations for Louisiana

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. Goals 4-G and 4-I provide suggestions for pension system structures that are both sustainable and fair.

State response to our analysis

Louisiana disagreed with NCTQ's conclusion "that the state's system is not financially sustainable according to actuarial benchmarks." Since the late 1980s, Louisiana has taken important steps in the payment of the unfunded accrued liability (UAL) of the system—steps that will result in an increase in its funding status. In 1987, Louisiana, through a constitutional amendment, addressed the payment of Teachers Retirement System of Louisiana (TRSL's) UAL resulting from the granting of benefits and increases in benefits without funding in previous years. Louisiana has also enacted a constitutional amendment providing 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.

The Louisiana legislature in 2009 enacted a law (ACT 497) that, after applying certain credits, reamortizes the system's debt and provides for payments toward all unfunded accrued liability that are more manageable than those set forth in prior schedules. Another important measure is a provision that dedicates the first $200 million in excess investment returns to the payment of this debt.

In 2010, the Louisiana legislature enacted additional laws that will have the effect of increasing TRSL's actuarial soundness. Act 992 of the 2010 legislative session 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. Act 921 of the 2010 legislative session restricted TRSL's retirees' ability to return to work without a benefit suspension. The actuarial note for Act 921 reports that the measure will result in a net annual savings of $108 million. A third measure amended Louisiana's constitution to require that any retirement benefit provision having an actuarial cost must be passed by two-thirds of the members of the legislature.

In 2011, the Louisiana legislature passed measures related to the payment of surplus state funds toward TRSL's UAL. These measures include a provision that will provide for the mandatory payment in FY 2013-2014 and 2014-2015 of a minimum of 5 percent of any state funds designated annually as nonrecurring (surplus funds) toward TRSL's UAL. Thereafter, a minimum of 10 percent of surplus funds are required to be applied to the UAL. 

Louisiana asserted that TRSL's funding structure is actuarially based and the system is financially sustainable. Annually, the TRSL actuary determines the annual funding requirement needed to meet current and future benefit obligations. Actuarial contributions are based on normal cost and amortization of the unfunded accrued liability existing since the system's inception. TRSL's normal cost in fiscal year 2011-2012 is 5.97 percent. All actuarial calculations and the annual actuarial valuation are prepared in accordance with generally accepted actuarial principles and practices and conform to Governmental Accounting Standards Board requirements.

Last word

NCTQ maintains that a system that is only 54.4 percent funded is not financially sustainable and does not meet recommended benchmarks. The state's response shows that even with over two decades of "important steps," it is burdensome to pay off a liability once it has accrued. Recent legislation has taken concrete steps to raise the retirement age and reduce the benefits to current and new members, but these steps should have been take much earlier, and 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 5.97 percent, over 2 percent below teachers' current contributions, and is less than 20 percent of the total percentage (31.7) 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.

How we graded

Many states' pension systems are based on promises they cannot afford to keep.

Teacher salaries are just one part of the compensation package that teachers receive. Virtually all teachers are also entitled to a pension, which, upon vesting, provides compensation for the rest of their lives after retirement. In an era when retirement benefits have been shrinking across industries and professions, teachers' generous pensions remain fixed. In fact, nearly all states continue to provide teachers with a defined-benefit pension system, an expensive and inflexible model that neither reflects the realities of the modern workforce nor provides equitable benefits to all teachers.

Under defined benefit systems, states have made an obligation to fund fixed benefits for teachers at retirement. However, the financial health and sustainability of many states' systems are questionable at best. Some systems carry high levels of unfunded liabilities, with no strategy to pay these liabilities down in a reasonable period, as defined by standard accounting practices. Without reform, these systems are a house of cards, vulnerable to collapse as funding cannot keep up with promised benefits. And it is taxpayers who will have to pay if it all tumbles down.

Pension plans disadvantage teachers early in their careers by overcommitting employer resources to retirement benefits.

The contribution of employers to their workers' retirement benefits is a valuable benefit, important to ensuring that individuals have sufficient retirement savings. Compensation resources, however, are not unlimited, and they must fund both current salaries and future retirement benefits. Mandated employer contributions to many states' teacher pension systems are extremely high, leaving districts with little flexibility to be more innovative with their compensation strategies. This is further exacerbated for states in which teachers also participate in Social Security, requiring the district to pay even more toward teacher retirement. While retirement savings in addition to Social Security are necessary, states are mandating contributions to two inflexible plans rather than permitting options for teachers or their employing districts.

This approach to compensation disadvantages teachers early in their careers, as the commitment of resources to retirement benefits almost certainly depresses salaries and prevents incentives. Lower mandatory employer contribution rates (in states where they are too high; in some states they are shamefully low) would free up compensation resources to implement the kinds of strategies suggested elsewhere in the Yearbook. In addition, some states require high employee contributions; the impact this has on teachers' paychecks may affect retention, especially early in teachers' careers.

Research rationale

NCTQ's analysis of the financial sustainability of state pension system is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office, 2007, 30 and Government Accounting Standards Board Statement No. 25.

For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Robert Costrell and Michael Podgursky. "Reforming K-12 Educator Pensions: A Labor Market Perspective." TIAA-CREF Institute (2011).

For evidence that retirement incentives do have a statistically significant effect on retirement decisions, see Joshua Furgeson, Robert P. Strauss, and William B. Vogt. "The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions", Education Finance and Policy (Summer, 2006).

For examples of how teacher pension systems inhibit teacher mobility, see Robert Costrell and Michael Podgursky, "Golden Handcuffs," Education Next, (Winter, 2010).

For additional information on state pension systems, see Susanna Loeb, and Luke Miller. "State Teacher Policies: What Are They, What Are Their Effects, and What Are Their Implications for School Finance?" Stanford University: Institute for Research on Education Policy and Practice (2006); and Janet Hansen, "Teacher Pensions: A Background Paper", published through the Committee for Economic Development (May, 2008).

For further evidence supporting NCTQ's teacher pension standards, see "Public Employees' Retirement System of the State of Nevada: Analysis and Comparison of Defined Benefit and Defined Contribution Retirement Plans." The Segal Group (2010).