Pension Transparency: Louisiana
Pensions Policy
Analysis of Louisiana's policies
Teachers, policymakers and taxpayers deserve accurate and reliable information about the costs and benefits of the public pension systems they support.
Just as teachers can easily obtain their salary schedules, they should have access to information about pensions so that they can make informed decisions about their career and retirement futures. While Louisiana provides teachers with an annual benefits statement, the report includes very limited information about the value of pension benefits. Louisiana does not provide teachers with information on how their benefits accrue for each year of service, the amount contributed each year by teachers and employers on behalf of teachers, or the projected value of a teacher's contributions based on different assumptions about the rate of return expected (e.g. 4%, 6%, and 8%). Louisiana also does not provide teachers with transparent information about the opportunity cost of leaving contributions in the system by reporting how much might be earned if teachers were to put contributions into a personal retirement savings account.
Teachers in Louisiana enroll in a final-salary DB plan, which means that employee and employer contributions should be sufficient to pre-fund the employee's pension. As Louisiana has a multi-tier pension system, contributions that exceed the normal cost may be used to fund other teachers' benefits (so-called legacy costs). Louisiana, however, does not provide teachers with clear information about how their contributions are being used, including the extent to which current employer contributions are being used to subsidize the retirement benefits of teachers under other tiers as well as how benefits are distributed across teachers of different cohorts and teachers with different career lengths.
Public disclosures on teacher pensions in Louisiana also lack transparency. Louisiana does not report projections for future contributions required to fully amortize the system's total unfunded liabilities, information that would allow policymakers and employers to better plan their budgets in the short and longer terms. These projections should be reported under a range of assumptions about the rate of return on investments, not just under the system's own assumption, which would allow stakeholders in Louisiana to appropriately assign risk to the system's obligations and provide clarity about potential unfunded liabilities facing taxpayers.
The Government Accountability Standards Board (GASB) requires public retirement systems to disclose who makes employer contributions, and the proportion of total contributions for which each contributor is responsible. All states' pension systems collect this information, and Louisiana makes these data readily available.
Louisiana, like most states, reports the portion of total pension contributions that is normal cost and the proportion that is amortization cost. However, the state does not report information about whether it has taken on debt in order to pay for current or future retiree benefits (e.g. through pension obligation bonds or other instruments for raising capital). Even if the state has not taken on debt, it should disclose this information to the public as it is an important indicator of the state's overall health and stability.
Recommendations for Louisiana
Provide teachers with the information necessary to understand their retirement benefits.
Louisiana should provide much more detailed information to teachers about how their benefits accrue at different points during their careers, as well as information about the opportunity costs related to any contributions made into the system. The plan should also disclose to teachers how their contributions are being used (i.e. whether they all are directed at prefunding their own retirement, or whether a portion of their contributions are used to help pay for retirement benefits of other members). Moreover, Louisiana could provide detailed information about how employer contributions are used - e.g. to what extent the employer contributions for an individual teacher are used to subsidize teachers in different tiers and teachers with different tenure.
Report to policymakers and the public data that give a complete representation of the system's financial health.
Louisiana should also report projections for future contributions necessary to pay off its unfunded liabilities under a range of assumptions about its discount rate. Finally, the state should disclose in its reports whether or not the system has taken debt service to pay for retirement benefits.
State response to our analysis
Louisiana responded that TRSL's funding structure is actuarially-based and the system is financially sustainable. Annually, the TRSL actuary determines the funding requirements needed to meet current and future benefit obligations. Actuarial contributions are based on normal cost and amortization of the unfunded accrued liability (UAL) existing since the system's inception.
The state continued that from the annual actuarial valuation provided on TRSL's website, the public can view the amount of funding required to meet the cost of benefits and amortized payments to the debt. The amount and percentage breakdown for the total normal cost are included. The valuation also provides dollar amounts for legislatively-mandated funding requirements including the employee contributions and employer contributions. Those figures can be compared to the amounts paid in the two previous consecutive years in each annual valuation.
As part of the Pension Accounting & Financial Disclosures section of the actuarial valuation, employers can review the sensitivity of the net pension liability to changes in the discount rate. The pension liability is shown as it relates to the current discount rate, and it is calculated using a discount rate that is 1% higher and 1% lower.
Each year, TRSL's actuary provides a UAL Outstanding Balance and Payment Schedule in the actuarial valuation which shows the projected outstanding balance and total amortized payment from the current year to the required payoff date.
With regard to information provided to our members, they are given a wealth of information in their annual Member Account Statement. The statement provides the member's annual contributions as well as his/her total contributions as of the end of the fiscal year. The statement provides information about service credit and contributions such as an explanation of service credit for benefit computation and eligibility, the different kinds of retirement options, eligibility requirements, personalized projected retirement eligibility, and a benefit estimate for regular retirement or early retirement.
Member Access online accounts provide members with secure, online access to review their contributions, service credit, and Member Account Statement at any time. Through TRSL's website, members can access TRSL's online benefit calculator and numerous brochures and handbooks on various types of retirement and retirement options.
Additionally, TRSL offers numerous opportunities for members to learn about their benefit and retirement options. Monthly individual phone counseling sessions and webinars on different retirement topics are available. Members can attend workshops across the state and receive personalized benefit estimates as well as educational materials. Members can meet with a retirement benefit analyst to discuss their retirement benefit and options anytime during regular business hours.
Updated: December 2017
Last word
Louisiana's response indicates the state has a commitment to providing the public and teachers with information about the retirement system. The recommendations offered would allow the state to provide even more meaningful and useful data to decision makers and future retirees. While the state has numerous options and opportunities available for teachers should they pursue them, it would be much more beneficial in helping teachers to be knowledgeable and informed if information were provided to them without their having to pursue it.
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Research rationale
In order for a state to have pension transparency, it is critical that the state discloses all financial and other data necessary for policymakers, school districts, and taxpayers (including teachers) to have a clear and accurate depiction of the current standing and future health of the system. For teachers, the recipients of pension benefits, there should be clarity on the future of their own retirement benefits.
All pension systems provide some basic public reporting, including annual financial statements, known as the Comprehensive Annual Financial Report (CAFR), and actuarial valuation reports.[1] Yet the information in these reports rarely provides more than minimal insight into the systems' financial health. Similarly, most systems make some basic information available to teachers through member statements and web-based resources. But teachers need more detailed information to help them to really understand their own prospective benefits and to enable informed decisions about their career and retirement futures.
Many states provide online benefits calculators, which, as the name suggests, calculate information about benefits based on parameters entered by the user. While these tools are helpful and important, they are not nearly sufficient. Teachers have to know that the tools exist, understand what they do, and be motivated to use them. The calculators also provide rough estimates of very high-level information. Teachers need more information that is presented in a clear way and delivered to them, whether they ask for it or not.
It is vital that states report to individual teachers the amount contributed by them and the amount contributed by their employer. States could also achieve this by reporting how much might be earned if teachers were to put contributions into a personal retirement savings account. It is recommended that states provide consistent data on how teachers' pension wealth accrues at one or a few points in time over the course of teachers' careers. States should also provide data on the lifetime value of benefits accrued at a given service year for all or most years of future service. Such reporting would allow teachers to understand what they put in to their retirement nest eggs and compare that to what they might expect to get out in future benefits. This information would also help teachers plan for timing their retirements in a way that best suits their personal circumstances. In general though, teachers across the country are provided with little or no information about how their benefits accrue over time, leaving them poorly positioned to make decisions that are in their own best interests.
Efforts to increase transparency are hampered by some common practices, including that rates of return assumed by most states are often way too high. What's even more staggering than the estimated $516 billion in accrued teacher pension liabilities nationwide is that this debt estimate is likely wildly optimistic, based on unrealistic rates of returns on investments for the pension system, as well as exceedingly long balance payoff dates (amortization periods).[2]
Funding pension benefits requires the use of projections, or actuarial assumptions, about the future. Demographic assumptions are expectations about a pension plan's membership, such as changes in the teaching workforce or the number of retired plan participants, when participants will retire, and how long they will live after they retire. Pension systems also make economic assumptions about factors such as the rate of wage growth and the expected investment return on the funds.
System officials know well that much of the current pension math is optimistic, at best. But assuming a return rate closer to reality would make the vast majority of the nation's pension systems less than 50 percent funded and would force states to come up with even more money to cover today's pension costs.[3]
States use accounting practices that obscure the depth of the pension crisis. The paying down of a defined benefit retirement plan's unfunded liability over a reasonable period of time (amortization period) can be structured in many ways. The expected years to fully fund pension systems hide the fact that states have a number of ways to pay off their pension debts. Like a homeowner paying a mortgage, states can make regular-level payments using defined payment schedules called closed amortization periods.[4] On the other hand, states can effectively refinance their pension debt annually (open amortization), resetting the amortization target date indefinitely. These and other, more complicated accounting procedures are not commonly understood.
Rather than using practices that obscure the health of their pension systems, states have a responsibility to provide teachers with accurate, thorough, and easy-to-comprehend information so that they can understand their own retirement benefits.
[1] Doherty, K. M., Jacobs, S., & Leuken, M. F. (2017, February). Lifting the Pension Fog. National Council on Teacher Quality, EducationCounsel. Retrieved from https://www.nctq.org/dmsView/Lifting_the_Pension_Fog
[2] Doherty, K. M., Jacobs, S., & Leuken, M. F. (2017, February). Lifting the Pension Fog. National Council on Teacher Quality, EducationCounsel. Retrieved from https://www.nctq.org/dmsView/Lifting_the_Pension_Fog; For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Costrell, R. M., & Podgursky, M. (2011, February). Reforming k-12 educator pensions: A labor market perspective. New York, NY: TIAA-CREF Institute. Retrieved from https://www.tiaainstitute.org/public/institute/research/briefs/institute_pb_reforming_K-12_educator_pensions.html
[3] For additional information on state pension systems, see Loeb, S. & Miller, L. (2006). 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. Retrieved from http://web.stanford.edu/~sloeb/papers/Loeb_Miller.pdf; and: Hansen, J. (2008, May). Teacher pensions: A background paper. Committee for Economic Development. Retrieved from http://eric.ed.gov/?id=ED502293
[4] Doherty, K. M., Jacobs, S., & Leuken, M. F. (2017, February). Lifting the Pension Fog. National Council on Teacher Quality, EducationCounsel. Retrieved from https://www.nctq.org/dmsView/Lifting_the_Pension_Fog