Debt Reduction is Critical to Louisiana’s Comeback
We recently outlined what’s at stake with each of the Constitutional amendments on the October ballot. Of those, the Pelican Institute has a position on just one: we recommend a yes vote on Constitutional Amendment Three. Early voting starts Saturday, September 30th and ends on October 7th. Election day is October 14th. It’s a big football weekend around the state, with a lot of home games, so plan to vote early!
Here’s some background and why we support this policy:
Louisiana’s four main state retirement systems have a combined debt of over $17 billion. This means that current fund balances do not have enough money to pay all retirees, so the state has had to borrow to make up this gap. While more substantive pension reform should be on the agenda for the legislature to tackle, this is an important step to paying down the current liability.
Representative Richard Nelson passed Act 107 during the 2023 legislative session that requires, if voters approve CA3, the legislature to use a minimum of 25 percent of surplus, non-recurring state tax dollars to pay down the state’s retirement system debt.
This amendment would increase the required payment from 10% to 25% of surplus funds. It would also change which retirement debt these payments would cover by allowing it to go toward debts that have accrued since 1988 and would remove the 2029 expiration date. It would also make two other state retirement systems eligible to receive some of the surplus money, Louisiana State Police Retirement System, and the Louisiana School Employees’ Retirement System. These funds cannot be used to pay any benefit increases or cost of living adjustments for retirees. This is simply to pay past debt.
It’s worth noting, the state government spends approximately $1 billion of its operating budget every year to make payments towards this debt. They do this by paying it as an “employee benefit” that employees never see and isn’t explicit within the budget. It is computed as a percentage of an employee’s salary that the state agency must pay on the employee’s behalf. For example, if the Department of Corrections wishes to hire a new Corrections Seargent at $50,000 annual salary, then the state must account for an additional 42% or $21,000 to pay for retirement expenses, some of which is for that actual employee. Amazingly, though, nearly three-quarters of this is to pay past retirement debt. That makes the real cost of this employee is $71,000, which puts a strain on the agency’s budget and its ability to pay a salary that is competitive with nearby states. By putting additional resources into paying down debt, that percentage rate will down, and the burden on the agency operating budget is lessened.
Paying down more debt more quickly, which must be paid or risk bankruptcy, would put the state on a stronger financial footing and ease the burden on the state’s annual operating budget, freeing up state funding for other priority items or even tax relief. Paying down retirement debt early lowers the overhead cost of employees, especially those in the Teachers Retirement System, which is the responsibility of local school district and university systems. This will free up funding for higher teacher salaries.
Here’s some additional background: The first time the state borrowed money to stabilize the state’s pension systems, thus incurring this debt, was in 1988, called the Initial Unfunded Accrued Liability (IUAL in acronym-speak). It is by far the largest debt and is set to be paid off in 2029.
Under current law, after 2029, or whenever the “IUAL” debt is paid off, the 10% requirement ends.
Amendment Three is a smart move to pay down more debt more quickly, with great benefits to both state and local governments – and, ultimately, taxpayers – while at the same time making progress to ease additional debts currently in the system. For these reasons, we support the passage and urge a “yes” vote on CA3.
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