(The Center Square) — A report provides suggestions on ways Louisiana can save and make money by investing reserves and paying off liabilities.
The Louisiana Legislative Auditor’s Office report provides information on the status of the state’s budgetary reserves or “rainy day funds” as of the end of fiscal year 2024 and potential opportunities for the state to better manage these reserves.
Two funds make up the reserve: The Budget Stabilization Fund, $1.1 billion and decades old, and the Revenue Stabilization Trust Fund, $2.8 billion and relatively new.
Both funds are invested as part of the General Fund portfolio, which mainly holds bonds, notes, and bills and earned a 1.3% annual rate of return over the past 10 years.
However, state law allows the revenue stabilization fund to be invested in stocks and equities, which can hold up to 35% of its value and earn a 4.2% rate of return over the same period.
Investing the revenue stabilization fund in this manner over fiscal years 2020 through 2024 would have earned the state an additional $22 million in interest, dividends, and realized capital gains and $122 million in unrealized capital gains.
Although equity investments generally have higher rates of return on investment than debt investments, equity is riskier because it often falls in market value during economic downturns.
Because of the potential for equities to lose value, any decision regarding investment strategy for the state’s budgetary reserves should be made in conjunction with setting the target level of budgetary reserves.
That’s why the auditors also suggested lowering the size of the budgetary reserve.
Auditors say there is no generally agreed upon optimal level of budgetary reserves for states, but the largest amount implied by rating agencies’ criteria for budgetary reserves is $2.2 billion.
This is $1.6 billion less than the $3.8 billion that the state currently holds. Compared to other southern states, Louisiana’s overall financial resources are the third-smallest, but its budgetary reserves are the third-largest.
For FY 2025, Act 723 of 2024 lowered the minimum fund balance to $2.2 billion, raised the maximum allowable appropriation amount to 33%, and authorized appropriations to address emergency conditions across the state with two-thirds vote of each house.
With that extra money, the state could pay off the unfunded accrued liability in the state’s retirement systems. Unfunded accrued liability is essentially a debt that the state owes to the retirement systems.
Paying the liability ahead of schedule would save state and local government entities from having to pay 57 cents of interest for every extra dollar the state pays.
The state could prioritize upfront savings by paying down the original amortization bases, which are scheduled to be paid off by the end of FY 2029, or long-term savings by paying down the experience account amortization bases, which are scheduled to be paid off by the end of FY 2040.
Contributing funds towards these liabilities would provide a higher overall return on investment than keeping the funds in the Louisiana Department of Treasury mostly because the retirement systems are less restricted in how they invest their funds than the state treasurer.
