Opinion ID: 1803409
Heading Depth: 1
Heading Rank: 30

Heading: Amendments to Formula

Text: In the plaintiffs' fourth constitutional challenge, they asserted that Acts 792 and 1293 of 1997, as they amended the formula in La. R.S. 11:103, violate La. Const. art. 10, ง 29(E)(3) and (4). The plaintiffs contend that the amendments turn the formula in La. R.S. 11:103 into a method by which the expected costs of expenditures will ultimately drive or fix the amount of the employer contribution and result in a formula in which there are no limits to the costs that are passed on to the employers. The plaintiffs urge that these acts violate the constitution because application of a formula which allows the employer contribution rate to float makes the value of assets and the value of expected future contributions undeterminable. The plaintiffs argue that these two amendments to the formula in La. R.S. 11:103 have allowed the unfunded accrued liability to continue to grow and that the growth of the unfunded accrued liability is inconsistent with the mandate to maintain actuarial soundness. Finally, the plaintiffs complain that this system is unfair because the employers have no say in granting benefits, authorizing cost-of-living increases or investing the assets of the retirement system, all factors which could cause the employers' contribution rate to rise under the formula. As previously stated, Act 792 of 1997 amended La. La. R.S. 11:103(B)(1) and (3)(a) and (C)(1). Act 792 did not change the already existing employer contribution rate setting formula. [121] The changes in La. R.S. 11:103 made pursuant to Act 792 of 1997 did not change the statute into an expenditure driven employer contribution rate formula. Plan expenditures, including benefits and administrative expenses, have always been one factor in the overall rate setting equation. The amendments to the statute did not change the nature of the formula, the amendments merely clarified some of the factors of the formula. Act 1293 of 1997 amended La. R.S. 11:103(C)(2)(b) to clarify that the fixed portion of the net direct employer's contribution is not fixed as the sole portion of the direct employer's contribution to the system but is actually a targeted portion of the direct employers' contribution. In addition, the legislature enacted La. R.S. 11:103(C)(2)(b)(iv) to provide that the targeted rate was to be treated as a fixed rate unless a higher or lower rate results from application of the entire formula. Contrary to the district court's conclusions, the combination of Acts 792 and 1293 did not cause the employer contribution rate to float to cover future expenditures and benefits; these acts clarified that the employers' contribution rate does float, and always has. [122] The statute has always required the employer contribution rate to be higher or lower if the circumstances warranted. [123] As previously explained, that is the nature of a defined benefits plan, i.e. the shortfalls of the system are balanced by increases in the employers' contribution rate. [124] La. Const. art. 10, ง 29(E)(3) requires the legislature to determine for public retirement systems the required contributions of employees, employers, and dedicated taxes. The legislature does this by statute, as previously explained. In addition, La. Const. art. 10, ง 29(E)(3) requires that the legislature must include in its considerations the elimination of the unfunded accrued liability as of the end of the 1988-1989 Fiscal Year, by the year 2029. The unfunded accrued liability (UAL) of a public retirement system is described in the 2001 Legislative Auditor's Actuarial Report as: that portion of the actuarial accrued liability that is not funded by the system's Valuation Assets on the valuation date. Normally, as of each valuation date, it consists of the unamortized value of the initial unfunded accrued liability (IUAL) and the unamortized values of supplemental accrued liabilities that may be generated each year. These supplemental liabilities originate through actuarial gains or losses, changes in actuarial assumptions or funding methods, and any changes in benefit structures. The UAL is amortized according to the payment methods and periods specified by statute. Under some actuarial cost methods, supplemental accrued liabilities are not amortized and are funded as future normal cost payments. [125] Contrary to the plaintiffs' contention, the evidence shows the legislature is working to eliminate the unfunded accrued liability of the FRS. The annual calculation of the employer contribution rate includes the determination of the amortization of the unfunded accrued liability in order to ascertain the year's payment. [126] In addition, the legislature in 2003 enacted La. R.S. 11:103(D), which, effective with the June 30, 2002 valuation, combined, offset and reamortized all outstanding amortization bases in existence on June 30, 2002, exclusive of merger bases, over the period ending June 30, 2029, with level dollar payments. Thus, the legislature has taken actions to ensure that the unfunded accrued liability be eliminated by the constitutionally-required deadline of the year 2029. La. Const. art. 10, ง 29(E)(4) prohibits the state and the governing authority of each state and statewide public retirement system from taking any action that shall cause the actuarial present value of expected future expenditures of the retirement system to exceed or further exceed the sum of the current actuarial value of assets and the actuarial present value of expected future receipts of the retirement system.... The evidence shows that there have been no actions taken relative to the FRS which have violated this constitutional requirement. The annual actuarial valuations performed from 1989 through 2002 and admitted into evidence show that the actuarial present value of expected future expenditures of the system, i.e. the benefits which will be paid in the future to the system's members, have not exceeded or have equaled the sum of the actuarial value of the assets added to the present value of expected future contributions. [127] Thus, this constitutional requirement has been achieved by the FRS. The amendments to La. R.S. 11:103 at issue here are not responsible for the existence of unfunded accrued liabilities in the FRS. Some actuarial funding methods create unfunded accrued liabilities, some do not. The actuarial funding method set by statute for the FRS creates unfunded accrued liabilities. [128] Nor did the amendments to La. R.S. 11:103 cause the unfunded accrued liability in the FRS to grow. The evidence shows the unfunded accrued liability in the FRS has grown as the result of several factors, but primarily due to the exponential growth of the system over the time period at issue. As the FRS merged with local firefighter retirement systems, the FRS absorbed the unfunded accrued liabilities of the individual local retirement systems. As the FRS took on more and more systems, the unfunded accrued liability of the system grew. In addition, the FRS membership more than doubled in the time period at issue, meaning that future benefits that must be accounted for has grown, as well. During the same time period, the FRS experienced under-performance of its investments. The record indicates the increase in the unfunded accrued liabilities, and the need for an increase in the employer contributions, was anticipated even in the late 1980's, when the investments were doing well. [129] The presence or growth of unfunded accrued liabilities in the actuarial equation is not inconsistent with the constitutional requirement that the public retirement systems maintain actuarial soundness. The unfunded accrued liability is but one factor in the multi-level formula for determining actuarial soundness of the system. To focus on one factor in the multi-level formula to the exclusion of the other 40 or 50 factors and without the proper context is error. The one factor of the unfunded accrued liability taken alone, or the increase of it, does not destroy actuarial soundness. [130] An increasing unfunded accrued liability is nevertheless consistent with maintaining actuarial soundness provided there is a funding structure present to liquidate the liability. A floating employer contribution rate as determined by La. R.S. 11:103, which increases the assets of the system to offset increased liabilities, helps the current funding structure of the FRS to achieve this. The plaintiffs' other contentions are without merit, as well. The plaintiffs' claim that the floating employer contribution rate would make the value of assets and the value of future contributions undeterminable is refuted by the fact that the system actuaries perform that determination annually. In addition, the plaintiffs' complaint that they have no input into the retirement system is not entirely accurate. Two of the eight trustees on the board of the FRS directly represent the interest of the employers of FRS members. Both the executive director of the Louisiana Municipal Association, and a mayor appointed by the Louisiana Municipal Association that has a fire department participating in the system, are on the FRS board of trustees. [131] Moreover, to the extent that the plaintiffs seek a change in the legislative allocation of responsibility for the funding of the FRS or input into the system itself, the plaintiffs must address those complaints to the legislature, and not to the judiciary. Ultimately, the legislature is responsible for maintaining the actuarial soundness of the system. The legislature has sole discretion within its funding authority to determine by which method it will maintain actuarial soundness of the statewide public retirement systems, including increased employer contribution rates, amendments to the formula described in La. R.S. 11:103, or direct assistance from the state. The legislature has shown by its actions that it is actively monitoring the public retirement systems. The legislative auditor conducts periodic actuarial valuations of the retirement systems. [132] The legislative auditor recommends improvements to the systems to the legislature and points out any problems which are perceived through the audit. The 2003 amendment enacting La. R.S. 11:103(D), through which the legislature combined, offset and reamortized all outstanding amortization bases in the FRS until 2029, exhibits the legislature's close scrutiny of the FRS system. Finally, on June 30, 2002, the legislature appropriated an additional $4,500,000 to the FRS for the purpose of subsidizing the increase in the employer contribution rate (from 9.00% to 18.255) that was recommended by the Public Retirement Systems' Actuarial Committee for fiscal year ending June 30, 2003. [133] For the foregoing reasons, the district court's conclusion that Acts 792 and 1293 of 1997 are unconstitutional violations of La. Const. art. 10, ง 29(E)(3) and (4) are reversed. [134]