Jan 25, 2012
The Current Retirement System Is Unsustainable & Irresponsible:
State retirement costs have quadrupled over the last two decades from $478 million in FY90 to $1.9 billion today.
The gap between promised benefits and assets on hand – known as the UAL – has tripled over the past two decades to $18.5 billion today.
The UAL for the four state retirement systems is almost triple the total payroll of employees covered by those systems.
Louisiana taxpayers are spending nearly $2 billion on state retirement just this year. If costs continue on the current path, the state could see an additional $3 billion or more added to the UAL by the end of the decade.
If action isn’t taken now to reform state pension systems, then the state will be forced to choose among several unacceptable options: break the state’s promise to workers, be forced to cut critical services like higher education and healthcare, and/or saddle future generations with debt and higher taxes.
Governor Jindal’s Reform Plan Will Keep Our Promise To State Employees & Save Taxpayer Dollars:
The Governor’s pension reform plan keeps the state’s promise to workers and prevents tax increases and cuts to higher education and healthcare.
Governor Jindal’s proposals will save taxpayers over $450 million in the first year and over $1.5 billion over the next five years.
The immediate UAL reduction will be at least $500 million and the UAL won’t continue to grow at the same rate.
The Governor’s pension reform will free up money at agencies so that colleges can invest in classrooms and we can invest in healthcare services. Agencies have been stuck absorbing retirement cost increases in recent years and now with these reforms, they can invest in other critical services.
The reforms will not impact retirement for employees in K-12 schools or employees in law enforcement and other hazardous duty positions.
Redesigning & Modernizing State Retirement For New Hires:
Under Louisiana’s current retirement plan design, Louisiana is making promises it cannot keep.
The current defined benefit plan does not change even when the cost of providing that benefit increases at an unsustainable rate, automatically putting taxpayers on the hook for more and more.
Traditional defined benefits plans do not favor modern workers who are looking for the freedom and flexibility to pursue public and private sector opportunities.
In the private sector, just 20 percent of workers nationally have a defined benefit plan. 401k’s and other defined contribution plans are much more common.
Other states have already taken the initiative to restructure their state retirement systems with Alaska moving to a defined contribution plan; states like Rhode Island, Indiana, and Utah have combined lower defined benefits with a defined contribution plan; and states like Nebraska and Kansas have implemented or are considering hybrid blends between defined benefit and defined contribution plans.
Gov. Jindal’s Reform Plan Redesigns Pension Plans For New Hires:
The Governor proposes implementing a hybrid plan for new hires – known as a cash-balance plan – which combines the best features of defined benefit and defined contribution plans.
The cash-balance plan will guarantee that the state is not promising a benefit greater than what the state can get in the market and will ensure the state doesn’t create a new UAL that digs the state’s debt deeper and deeper.
The plan will ensure employee savings for retirement are protected, passing the investment gains on to the employee but not the losses.
Under the plan, employees will receive a benefit at retirement that can be rolled over into another account, taken as a lump sum, or turned into a lifetime annuity.
The plan will be portable and better meet the needs of a mobile workforce by allowing state employees who leave before retirement to roll their savings into an IRA or other account.
The plan will allow employees to benefit from professional investment expertise since contributions are kept and invested by the retirement system on behalf of employees.
The plan gives state employees an investment account that can never lose value and can only grow in value when market conditions are good.
Mechanics Of The Cash-Balance Plan
Under the cash-balance plan, employees will still contribute 8 percent of payroll to their retirement.
Each year, participating employees receive a pay credit. This is a percentage of payroll credited to the employee which includes both employee and employer contributions.
Participating employees also receive an interest credit which represents the investment return earned by the pension system. The interest credit is set equal to the actuarial rate of return less 1 percent.
The 1 percent is held by the system to act as a buffer during market downturns.
Over time, pay credits and interest credits build up in the employee's account balance. This account balance can be rolled over when the employee leaves state service or annuitized when the employee reaches retirement age.
Gov. Jindal’s Reform Plan Keeps Our Promise To Current Employees
The Governor’s plan will reduce the incentive for artificial inflation of salaries toward the end of a career by calculating benefits using an employee’s salary averaged over five years rather than three years.
The reforms will align the retirement age with the Social Security standard of 67, while exempting anyone who is 55 or older and approaching retirement. Anyone who wants to retire early under the existing provisions can do so, with an actuarial reduction of benefits. Also, anyone who is currently eligible to retire can do so now without any reduction of benefits.
Cost-of-living adjustments should be granted when the state can really afford to pay them and when the state has assets on hand to pay all the retirement benefits already promised.
The Governor’s reforms will rebalance the retirement cost burden between taxpayers and employees by increasing the employee contribution rate by 3 percentage points. Even with this change, state employees will contribute one-third or less of the cost to support the retirement system.
In 1987, both state employees and university employees carried over 40 percent of the cost of supporting their retirement systems. Today, they carry 25 percent or less.
A national survey of state retirement systems found that employee contributions in 67 percent of the plans were more than 8 percent of payroll, including Social Security contributions.
A 3 percent increase is still far below the 7 percent increase in payroll costs that state has incurred in the past few years from investment losses.
Gov. Jindal’s Reform Plan Improves The Operations, Management & Governance Of State Pension Systems:
The Commissioner of Administration or his/her designee should be added to state pension boards to ensure pension boards understand the fiscal realities of protecting critical services like healthcare and higher education.
LSERS should be merged into TRSL to streamline administrative and overhead costs while taking advantage of economies of scale.
Today, each of the four state retirement systems has their own executive management, administrative, and investment staff. They each pay for their own actuaries, auditors, legal counsel, medical examiners, IT consultants, and investment advisors.
Today, LSERS has a high administrative cost per member of $172, well above the national benchmark of $101.
LSERS and TRSL also have a ratio of staff to plan participants that are well above industry standards. The plan participant to staff ratios are 681 to 1 in LSERS and 1,036 to 1 in TRSL, while the average university and government plan ratio is 3,945 to 1.