LASERS and TRSL retirement systems overview

1. LASERS and TRSLretirement systems overview Task Force on Structural Changes in Budget and Tax Policy August 26, 2016

2. Overview • Systems at a Glance • Funding Sources • Contribution Rates • Legislative Reforms • Act 497 of 2009 and Act 399 of 2014 • Unfunded Accrued Liability (UAL) • Discount Rate • Sustainability of Benefits • Employee Normal Cost Contribution • Where We Are Today • Summary 2

3. Systems at a Glance 3

4. Systems at a Glance 4

5. Funding Sources • The retirement systems are funded by three sources: • Employee contributions - established in law; average member contribution is 8% of salary for both systems • Employer contributions – based on actuarial calculations provided in statute; determined annually • Investment earnings - employer and employee contributions are pooled and invested by each system LASERS and TRSL do not have the same dedicated streams of revenue as statewide retirement systems. 5

6. Contribution Rates Employer Contributions • Employers contribute a percentage of payroll toward funding retirement benefits. • The employer contribution rate has two components: 6

7. Contribution Rates 7

8. Contribution Rates: Public vs. Private 8

9. Employer Contributions • LASERS • State payments to LASERS projected to decrease by $8 Million in FY 2017. • TRSL • Employer contributions to TRSL projected to decrease by $20 Million in FY 2017. 9

10. Legislative Reforms • The state has enacted significant pension reform over the last 25+ years. • Implemented reforms have impacted both: • Level of benefits • Funding • State is following payment plan to reduce the debt. • Reform measures are working. 10

11. Legislative Reforms • LASERS • $3 Billion in expected long-term cost savings adopted by the Legislature. • TRSL • More than $5 Billion in expected long-term cost savings adopted by the Legislature. 11

12. Pension Reforms in Louisiana = $8 B Long-Term Savings Green = Funding Change Blue = Benefit Change 12

13. Pension Reforms in Louisiana = $8 B Long-Term Savings Green = Funding Change Blue = Benefit Change 13

14. Acts 497 of 2009 and 399 of 2014 • Bottom line summary: • Reduced retirement system debt (UAL) • Additional investment gains used to reduce debt • Result is debt will be paid off sooner and/or will lower future employer contributions • Eliminated balloon payment • $1.8B savings for LASERS • $3.0B savings for TRSL 14

15. Act 497 of 2009 • New debt payment plan • Created “hurdles” • First $100M in LASERS excess investment gains • First $200M in TRSL excess investment gains • Requires excess investment earnings applied via the “hurdles” to be used to reduce debt before funds put in Experience Account for future COLAs. 15

16. Act 399 of 2014 • Limited frequency and amount of future COLAs • Increased amount of system investment gains used to reduce UAL • Indexed the original LASERS $100M and TRSL $200M hurdle • As systems’ assets grow, the amount of money applied to UAL also increases, based on a percentage. 16

17. Cost-of-Living Adjustments: Before and After • Pre Act 399, system could deposit value of two 3% COLAs into the Experience Account. • Now, if system is less than 80% funded, funds for only one COLA (currently based on 1.5% COLA) can be deposited in the Experience Account. 17

18. Act 497 and Act 399 Results • Excess investment earnings that would have gone to fund COLAs are now used to reduce system debt. • Size and frequency of COLAs now tied to funded level of the system. • COLAs limited to every other year until the system is 85% funded. • COLAs limited to first $60,000 of a member’s retirement benefit (indexed to the CPI-U as of July 1, 2015). 18

19. Act 497 and Act 399 Results • Prior to Act 497 of 2009 and Act399 of 2014, excess investment earnings would have been split equally between reducing the UAL and crediting the Experience Account which funds COLAs. • Now: More investment gains go toward reducing the UAL. • A combined $1.4 Billion in additional funds have been used to pay down the UAL since FY 2010. *Includes the 2010 sweeping of the Experience Account. 19

20. Other Legislative Initiatives – Potential Additional Revenue • Act 422 of 2011: Constitutional amendment which provides for no less than 10% of nonrecurring revenue to be applied to the IUAL (Appropriations to date: TRSL-$6.2M/ LASERS-$2.7M appropriated in 2015) • Act 679 (Proposed Constitutional Amendment) and Act 639 of 2016: Would allocate 30% of annual mineral revenues between $660 and $950 million and certain other mineral revenues to the IUAL.  20

21. Unfunded Accrued Liability (UAL) • The UAL is the difference between the system’s actuarial value of assets and its liabilities, which is calculated annually by the systems’ actuary. • The UAL has existed since the inception of both systems - LASERS (1946) and TRSL (1936). • Benefits were granted but not fully funded. • Significant reasons for the UAL include: • Insufficient payments; • Back-loaded payment schedules; • Negative experience account balance; and • Market downturn. 21

22. Unfunded Accrued Liability (UAL) • Existing debt is on a fixed payment plan, defined by statute. • Beginning in 2012 (LASERS) and 2013 (TRSL) payments are sufficient to pay all interest and a portion of the principal, therefore, reducing current debt annually. • Any future UAL changes, resulting from experience gains/losses, changes in assumptions, or changes in methods will be paid with level payments and a definitive pay-off date. • Problems of the past, resulting from back-loaded payment schedules, cannot be repeated by the state due to current law. 22

23. Discount Rate Reductions • Both LASERS and TRSL have lowered their discount rates twice since 2012. Current Rate 23

24. LASERS: Impact of Discount Rate Change to Employer Contribution Rate and UAL • Lowering the discount rate increased the employer contribution rate by 2.80% and the UAL by $722 million over 3 years. 24

25. TRSL: Impact of Discount Rate Change to Employer Contribution Rate and UAL • Lowering the discount rate increased the employer contribution rate by 3.14% and the UAL by $1.15 billion over 2 years. 25

26. Discount Rate Reduction Plan • January: The TRSL and LASERS FY 2015 valuation reports were approved by PRSAC with a 7.75% discount rate. • May/June: Both the LASERS and TRSL Boards adopted a preliminary discount rate reduction plan, including: • Annually reduce the discount rate in 0.05% increments from 7.75% to 7.50% • Begin July 1, 2016 • Short-term impact on the employer contribution rate, requiring additional funding • June: PRSAC voted to support the plan. • Recommended beginning first incremental reduction on June 30, 2017, to lessen the impact on employers. • July: TRSL and LASERS approved a final discount rate reduction plan including the PRSAC-recommended June 30, 2017, beginning date. 26

27. Estimated Cost of Discount Rate Changes 27

28. Sustainability of Benefits LLA Report on Sustainability of Louisiana State Retirement Systems, PRSAC, August 13, 2015 28

29. LASERS: Employee Normal Cost Contribution 29

30. TRSL: Employee Normal Cost Contribution 30

31. Where We Are Today: LASERS ACTIVEMEMBERS RETIREES EMPLOYERS 31

32. Where We Are Today: TRSL ACTIVEMEMBERS RETIREES EMPLOYERS 32

33. Summary • Systems are financially and actuarially sound. • State is following payment plan to reduce debt and is now paying principal and interest. • There is no balloon payment. • Cost of accruing benefits substantially lower than Social Security. • Positive economic impact in Louisiana – • Over $3 Billion in retirement benefits paid last year (combined TRSL and LASERS). • Approximately 90% goes to retirees and beneficiaries living in Louisiana. • Legislative reforms expected to reduce long-term costs by $8 Billion (combined TRSL and LASERS). 33