Unfunded accrued liability (UAL): The Facts

March 27, 2015

Fact: People often confuse the actual cost of providing a teacher’s retirement benefit with the state’s obligation to pay down debt accrued through years of underfunding the retirement system. These are two different costs.

Fact: Teachers and employers both make contributions to fund the actual cost of a retirement benefit. This is called the normal cost.

Fact: The normal cost for this school year is 13%. Of that, teachers pay 8%, and employers pay 5%. Next school year, the normal cost will decrease to 12.2% with the employer rate dropping to 4.2% and teachers continuing to pay 8%. It’s important to note that normal cost for employers is more affordable than the 6.2% employer rate for Social Security paid in the private sector.

Fact: For years, the state underfunded the retirement system, resulting in an unfunded accrued liability (UAL). As of June 30, 2014, the UAL associated with teacher retirements totaled $11.9 billion.

Fact: In addition to employers’ normal cost contribution, they also make payments on the UAL. In 1989, lawmakers chose to attach the state’s UAL payments to employer contributions. Therefore, going forward, employer contributions would have two components, the normal cost portion and the UAL payment portion.

Fact: Louisiana has taken responsible steps to pay off the UAL and protect the sustainability of the retirement system, including passing a constitutional amendment in 1989 to make annual contributions to actuarially fund the system. Louisiana has made the required contributions since that time.

Fact: In recent years, other cost-controlling legislation has been passed that directs more of the system’s investment earnings toward reducing the UAL; requires retirement provisions with a cost to have funding source that will cover the cost within 10 years; created a new tier of retirement benefits for new hires that increases the retirement eligibility age and the final average compensation (FAC) period; and requires 2/3 legislative approval for retirement provisions with a cost.

Fact: The UAL is not hidden. TRSL’s annual report provides a full accounting of the financial position of the retirement system each fiscal year. Furthermore, TRSL complies with standards set forth by the Government Finance Officers Association, the Actuarial Standards Board, and the Governmental Accounting Standards Board.