BATON ROUGE - Louisiana's state pension funds are seeking legislative sanction to increase their equity exposure.
A bill introduced March 31, the first day of the 1997 Legislature, would let three of the four largest public funds increase equity holdings to 70% of total assets from 55%.
But the increase would be conditional on investing 10% of total equities in an index fund by June 30, 1998. The bill also would clear up the definition of equities so the term applies only to shares of publicly traded corporations. Currently the systems must count real estate investments as part of equity because there is no clear-cut definition.
House Bill 629, which has a good shot at legislative passage this session, was approved by the House Retirement Committee in early April. The Senate Retirement Committee, which was scheduled to hear the bill in early April, now may hear the bill April 28 or May 5.Affected would be the $4.7 billion Louisiana State Employees' Retirement System, the $8 billion Louisiana Teachers' Retirement System and the $1.2 billion Louisiana School Employees' Retirement System. The systems now have no assets invested in indexed portfolios.
The fourth system, the $145 million Louisiana Police Pension and Retirement System, would need approval from members of a joint House-Senate retirement committee to increase its equity holdings up to 70%.
Because of its relatively small size, the police fund would not have to put any portion of its equity investments in an index fund, said Walter Smith, director.
The employees' fund, with 41% in equities (plus 4% in real estate, and 10% in a tactical asset allocation portfolio that can be entirely invested in stock), plans to conduct an asset allocation study if the legislation passes. It also would need to search for a stock index manager, said Robert Borden, chief investment officer.
Said James Hadley Jr., director of the teachers' system: "It provides us the ability to enhance our returns. Hopefully, we will also pay off the unfunded liability a bit faster."
He said his fund's returns (14.9% for the fiscal year ended June 30, 1996) continue to be dragged down by its large fixed-income commitment, targeted at 45% of assets. He said bonds returned 5%; equities, 22%.
Mr. Hadley also considers the legislation essential because the bull market - until recently - had bumped the system's exposure beyond the 55% limit.
"We would have had to sell several hundred million dollars worth of equities" to get back to the 55% limit, he said.
"Now is a good time to take advantage of that 55% to 70% jump," he said.
The police pension fund also is right at the 55% limit, Mr. Smith said.
A second House bill would help the same three pension funds reduce any unfunded liabilities and cut the state's steep contribution rate.
For the fiscal year ended June 30, the state contributed 12.3% of pay for employees covered by LASERS. The rate has not yet been determined for fiscal 1997, but probably will be close to 13%, Mr. Wood said. The state's contribution for those covered by the teachers' pension fund is 16.4%, and at least half of that is going toward paying off the approximately $4 billion unfunded accrued liability, Mr. Hadley said. The school employees' system is overfunded; funding stands at 112.3% of liabilities, said Julia B. LeBlanc, chief investment officer.
The police fund is only 40% funded. Employees contribute 8% of their annual pay while the state is chipping in 78% this year, in order to meet the 2008 deadline for getting rid of the $170 million funding gap, Mr. Smith said.
The bill would amend the Louisiana Constitution to let the state sell pension obligation bonds and use the money to reduce the unfunded liability. An earlier constitutional amendment requires the state to clear up its unfunded accrued pension liability by 2029. The legislation has not yet been heard in either chamber.
The employees' system is about one-third underfunded; the teachers' fund, which pushed for the legislation, is 38.6% underfunded.
No companion legislation has been introduced in the Senate yet.
The state would hope to take advantage of any spread between the 8.25% assumed actuarial rate on its pension liabilities and a lower interest rate it would offer the pension obligation bondholders. On top of that, the state hopes to earn fatter returns by reinvesting the proceeds from the bonds in the stock market.
The outlook for both bills could suffer if legislators get queasy about rising interest rates and stock market gyrations.
Mr. Hadley said he attempted to placate lawmakers' concerns by reminding them the pension funds are long-term investors.