Testimony: Louisiana Senate Bill 6 relies on a structurally flawed funding mechanism

A version of this testimony was submitted to the Louisiana Senate Committee on Retirement on March 28, 2022.

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.