Maureen Westgard and Cindy Rougeou had just begun to spread their message of fiscal responsibility when the bottom fell out.
While they were educating the public on the benefit of using some of the state’s $865 million surplus from 2007 to settle an old retirement debt, state officials shifted into crunching this year’s deficit numbers.
Three robust years of tax revenue from hurricanes Katrina and Rita reconstruction—followed by unprecedented energy prices—gave way to the recession. In one year, the state shifted from sharing unprecedented tax revenue with taxpayers to slashing the budget.
It’s a hard sell, but state officials say Westgard and Rougeou are on the right track. They’re doubtful that paying down nearly $11 billion in debt accrued from 1936-88 on unfunded state retirement benefits can compete with infrastructure projects such as roads and bridges for surplus dollars.
“We recognize that there’s going to be a critical time coming up very soon where those payments on the debt will be very large, and we have an opportunity to make them more manageable,” says Westgard, director of the Teachers’ Retirement System of Louisiana.
Rougeou, executive director of the Louisiana State Employees’ Retirement System, says the annual payment is fast approaching $1 billion a year. “We know there will be demands upon lawmakers to use the surplus money for other purposes,” Rougeou says. “However, we believe paying down the IUAL would be a fiscally responsible move and give our state its best return on the dollar.”
With the surplus possibly being the last one during the recession, Gregory Albrecht, the Legislature’s chief economist, says it can become tough to get those dollars when things become tight.
Surplus, or one-time, funds can’t be used to fix “an operating hole” but can be used for capital outlay, building needs and debt. Albrecht says paying down the retirement debt would be fiscally prudent, particularly when every dollar paid would save $4. The allocation is possible, but he says the Legislature and administration have historically applied surpluses to capital outlay.
“The issue is: Do you give up the use of that money today for roads, bridges and buildings to get a benefit 20 years from now?” he says. “That’s the tough decision. You can see these holes in the roads and see the bridges that need to be fixed and buildings that need to be repaired. It’s harder to see the benefit of an IUAL payment now and in the future.”
It’s also harder for taxpayers to see the ballooning debt cutting into the general fund every year, says Jim Brandt, president of the Public Affairs Research Council of Louisiana. Brandt also agrees the state should address the debt, especially with funds expected to become even tighter.
“It’s not a sexy subject, which doesn’t typically get the Legislature’s attention until it’s a crisis,” Brandt says. “It’s hard to get traction on an issue 20 years into the future, even with the cost rising to a $1 billion payment in the near future.”
PAR also has pushed consolidating the pension funds as a fiscally responsible move, but it didn’t get traction, either.
In 2005, the organization unveiled a plan to consolidate the state’s five largest pensions, including LASERS [$8.7 billion in assets] and TRSL [$15 billion in assets]. The move wouldn’t affect or solve the retirement debt problem, but Brandt says it would of lowered operating costs and improved efficiency.
“We have, for probably decades, looked at consolidation,” he says. “It’s tough going. Everyone wants their own system, and it’s essentially that. Employees have vested interest in their own system and feel they’d lose out in these sort of consolidations, so there’s resistance from virtually everyone involved other than those of us who have no stake in the systems.”
Legislators haven’t been supportive, either. Brandt says when PAR previously pushed consolidation, lawmakers sided with votes instead of cost cutting.
But in Illinois, the fight is on.
When the state’s unfunded liability hit a record $54 billion this year, State Treasurer Alexi Giannoulias threw up a red flag and proposed legislation to immediately merge its five state pension funds. Like many pension funds in the nation, Illinois officials panicked when fund assets dwindled from $70.5 billion in June 2007 to $50.5 billion by October, signaling a larger state contribution at a time when tax revenue is already tight. Giannoulias estimates consolidation could save up to $82 million a year in administrative costs and management fees, which would remain part of the assets.
The Illinois Education Association quickly mobilized in opposition.
IEA argues merging the assets into one investment portfolio would be too costly. Combining the traditional stock and bond portfolios alone could cost $226 million to $372 million. The group also maintains the funds have no investment problem, investment management fees are already low and combining investment pools would increase risk.
Rougeou raised the same arguments against merging the funds in Louisiana. She estimates combining TRSL and LASERS could incur at least $134 million in transaction costs. She concedes nearly every pension fund in the nation has been affected by the volatile stock market, but their investments are still generating the minimum required 8.25% return. Rougeou also says the investment returns don’t directly reflect a market downturn because they are evened out over a three-year period, which means one or two good years can compensate for a down year. Unlike Illinois, she doesn’t anticipate a shortfall in returns or assets.
“The only part that’s broken is the employer hasn’t stepped up to the plate and made the payments,” Rougeou says. “Had the employer [state] over the last 60 years made their employer contribution there would be no debt.”
Based on the current schedule, debt payments will not be enough to cover the 8.25% interest until 2012, so the principal is growing. And Rougeou says addressing the debt would be consistent with Gov. Bobby Jindal’s position of “getting your debt house in order.”
Rougeou and Westgard commend legislators for mandating a 2029 deadline to pay off the debt, as well as allocating $60 million toward it last year. They say also applying a portion of the surplus to lower the payments would put more state dollars to work for taxpayers and that’s good fiscal responsibility.
“It’s a win for everybody,” Rougeou says. “Would you rather keep paying interest payments, or would you rather build a road? It’s a no-brainer.”