A Pension Reform Primer
The top 10 things you need to know heading into Louisiana’s historic retirement debates.
By JEREMY ALFORD
Know this: the stakes are high. More than 60,000 state employees would be affected by Gov. Bobby Jindal’s proposed pension changes. And legislators, many still reeling from the drama associated with the governor’s landmark education reforms, are wondering what kind of political dustups the retirement debates might yield.
Jindal, however, is driving the initiative more than anyone else. For example, he ushered in changes to his proposals just days before they were slated for committee introduction this week. While the moves show a willingness to compromise and respond to criticism, it also adds more speculation about what will or will not be included in the finished product.
As a means to simplifying the issues, we’ve developed a top 10 list of arguments and topics that will help you prepare for the coming debates — and the high-stakes politics.
1.) Narrowing down the target
If you’re a K-12 teacher, police officer or first responder, breathe a sigh of relief. If you’re a non-hazardous state employee or university employee, then you need to educate yourself on the legislation up for debate.
2.) The list of wants
The Jindal administration is pushing for four big changes:
— Increasing the retirement age to 67
— Calculating retirement benefits based on five years of salary rather than three
— Increasing employee contributions from 8 percent to 11 percent
— Creating a new cash balance retirement plan for new employees only
Josh McGee, vice president of public accountability initiatives for the Arnold Foundation, offers up a litmus test for the proposed reforms through another list of four items. McGee argues that sound pension reform should meet the following general criteria:
— Establish transparency with respect to the true cost of the benefits promised to public employees
— Mandate that the pension plan sponsor pay the full cost of accrued benefits each year
— Require that the pension plan sponsor pay down the unfunded accrued liability over a reasonable time horizon
— Improve the generational equity, portability and security of benefits for public employees
3.) Raising the Age
Kristy Nichols, the governor’s deputy chief of staff, told reporters this week that there would be two tiers to this part of the package. Anyone in LASERS who is 55 or younger wouldn’t be able to fully retire until age 67, under the new Jindal plan. However, current workers who retire before 67 would still be eligible for all full benefits earned as of the date the proposed law takes effect. Benefits would be reduced for all days worked after the effective date of the proposed legislation
4.) Increasing contributions
Jindal wants workers to increase their contributions to LASERS by 3 percent. This money was originally slated for deposit into the general fund, but now the governor is promising to use some of the money to pay down the state’s $18.5 billion unfunded accrued liability.
In another change, the governor has decided against decreasing what the state pays into the system. Instead, it will remain as it is now. As such, there are questions of about whether the changes are enough to tip the scales.
Just consider a recent analysis by scholar Walter Russell Mead: “Minnesota’s pension plans, even after recent mandatory increases in employee contributions, are essentially hollow. Even using the state’s extremely aggressive ‘assumed’ rate of 8.5 percent annual return on its investments, the pension fund is about $10.5 billion short of being able to pay off its future obligations. For every $1 the state has promised to pay retired civil service workers and teachers, it expects to have about 79¢. The good fairies and the wood elves are responsible for coming up with the rest of the money.”
5.) Constitutional or not?
If there’s a primary argument from the opposition in regard to increasing the retirement age and worker contributions, it’s that the proposals are unconstitutional. The theme was bolstered two weeks ago when a law firm hired by the Louisiana Legislative Auditor’s Office, Strasburger & Price of Dallas, Tx., stated that the courts would likely rule any resulting laws as unconstitutional.
This is due primarily to state and federal constitutional language that positions retirement plans as contracts between the government and its workforce. “If such challenges occur,” reads the Strasburger & Price report, “we think it more likely than not that a court will rule such then-adopted bills as unconstitutional to the degree such bills affect the accrued benefits of current members and retirees.”
Nichols and other pension reform supporters contend that simply isn’t true and that Jindal’s plan — even before the recent changes — would pass muster with the courts. Not everyone agrees. Over the past few weeks alone, New Hampshire courts have ruled that lowering pensions is unconstitutional and Florida judges have made similar rulings insisting that increasing pension contributions is unconstitutional.
In the official response to the Strasburger & Price report, the Jindal administration said “opponents to reform threaten lots of lawsuits.” The administration also said the report was “filled with errors” and it based its conclusions on “cases from other states which are completely unrelated to Louisiana case law.”
Here’s more of the administration’s defense: “The Legislature has a constitutional mandate to maintain a sustainable retirement system – an obligation which exists both to protect the retirement system and taxpayers. The reality is that state retirement costs have quadrupled over the last two decades and our pension system is on an unsustainable path. Louisiana taxpayers are spending nearly $2 billion just this year on state retirement and the growth of state pension costs is crowding out critical investments in priority areas.”
There are certainly differing opinions out there. For example, attorney Ralph Benko, who serves as a senior advisor for American Principles in Action, recently wrote a paper focusing on the federal constitutional issue for the Pelican Institute. In the paper, he posits that a “contract clause is not an absolute bar to subsequent modification of a state’s own financial obligations.”
Here’s a more in-depth look at the Benko argument: “As with laws impairing the obligations of private contracts, an impairment may be constitutional if it is reasonable and necessary to serve an important public purpose. In applying this standard, however, complete deference to a legislative assessment of reasonableness and necessity is not appropriate because the state’s self-interest is at stake. A governmental entity can always find a use for extra money, especially when taxes do not have to be raised. If a state could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the contract clause would provide no protection at all.”
6.) Who takes part
Jindal took a lot of heat recently for not including himself in the retirement proposals. But the changes announced this week fold in Jindal as well as judges and other elected officials. The Times Picayune recently reported that “the administration said the officials had been excluded to avoid conflict with a separate law that bans reducing the compensation of elected employees during their term.”
The governor was also criticized for buying 2.2 years worth of service from LASERS to to accelerate his own retirement age — just as he was trimming the sails on the retirement programs of state workers. Jindal is also seeking to accelerate his own retirement date through the Teachers Retirement System of Louisiana.
Jindal spokesman Kyle Plotkin said too much shouldn’t be read into these moves, which are perfectly legal and “make sense” for the governor’s financial planning. “It has nothing to do with the changes,” Plotkin said, referring to Jindal’s proposed legislation.
While Jindal certainly took his lumps over these points, it’s important to note that any state employee could do the same right now if they choose.
7.) Odds-Making on Cash Balance
The governor’s proposal to create a new type of cash balance retirement plan for future hires has created the least amount of friction among his platform’s other planks. It closely resembles what you might find in the private sector. While it wouldn’t do anything to decrease the UAL, it could create some new liabilities if the investment environment gets rocky.
That’s all to say that the cash balance plan does have its critics. Public Affairs Research President Robert Travis Scott said the proposition of a cash balance plan is one reason why policymakers should be asking whether a taxpayer safety valve is feasible and warranted.
He said lawmakers should also look into the following in regard to the plan:
— How will the pain of short-term losses be smoothed out over time?
— Under dire financial circumstances in the future, is there some form of pre-planned cost-shifting to employees that might take place so that a newly accrued large financial burden is shared by both employer and employee?
— Or might there be a caveat that the employee terms and responsibilities could be altered under unusually difficult circumstances to alleviate financial pressure on the state?
“These are hard questions, and in fact go to the heart of our current dilemma,” Scott said. “Better to ask them now than later.”
8.) Who are the players?
Jindal is the ringleader in this policy battle. But he’s not alone. The lead authors are House Retirement Chairman Kevin Pearson, R-Slidell, and Senate Retirement Chairman Elbert Guillory, D-Opelousas. Behind the scenes, organizations including the American Legislative Exchange Council and State Budget Solutions have offered guidance to lawmakers and the administration.
On the side of the opposition, resistance has become much more organized than some might think. Recent pension hearings have featured committee rooms full of people who seem to know each other and who appear to agree on their collective mission of stopping the reforms.
What’s more is that opponents have one the best inside lines to the debate. They’re aligned with the executives and actuaries from the state’s retirement systems. These folks are old hands, pros at navigating the state systems. In comparison, the reformers are sort of like amateurs facing institutional roadblocks.
Opponents have also been joined by other special interests in their battle, like the Louisiana chapter of AARP. Meanwhile, other groups like the National Public Pension Coalition are making inroads in Louisiana as well.
The coalition, among others, is floating a conspiracy theory about the changes taking place across the country, not just in Louisiana: “In states across the country, there have been an unprecedented number of proposals by governors and state legislatures to completely undermine the retirement security of millions of middle class workers who rely on the public pension system… these public pension-cutting plans come at the very time politicians (who receive world-class benefits themselves) have teamed up with Wall Street aligned-groups — here on out referred to as the ‘one percenters’ — to malign and scapegoat America’s firefighters, police officers, teachers, and nurses in hopes of filling budgeting shortfalls caused by Wall Street greed and corporate malfeasance.”
Most everyone agrees that the UAL is a problem, but what do Jindal’s critics propose to do? For the most part, there doesn’t seem to be any alternative plans out there — and if there are, they have been poorly publicized.
For now, opponents are cheering the recent changes by Jindal, which could be a sign that any other victories they’re pursuing will be in the form of amendments. However, there has been a surge of support for changing Louisiana’s accounting methods.
Many supporters of Jindal’s plan have said they’re unsympathetic to many of the objections being raised by state workers due to their average pay. This particular argument dates beck to the birth of pension plans, which were in part created to help subsidize the low salaries of government workers. Today, however, there are several studies that show public sector salaries are outstripping their private sector counterparts.
According to the most recent Employer Costs for Employee Compensation survey from the U.S. Bureau of Labor Statistics, private industry employers spent an average of $28.57 per hour worked for total employee compensation in December 2011. Meanwhile, total compensation costs for state and local government workers averaged $40.90 per hour worked in December 2011.
So what’s going to happen? The U.S. Government Accountability Office recently conducted a review of what other states are doing and it offered these three key findings:
— Reducing benefits: There are 35 states that have recently reduced pension benefits, mostly for future employees due to legal provisions protecting benefits for current employees and retirees. A few states, like Colorado, have reduced post-retirement benefit increases for all members and beneficiaries of their pension plans. If these trends are any indication, Jindal’s plan could be adapted to reflect these shifts.
— Increasing member contributions: Half of the states have increased member contributions, thereby shifting a larger share of pension costs to employees.
— Switching to a hybrid approach: Georgia, Michigan and Utah recently implemented hybrid approaches, which incorporate a defined contribution plan component, shifting some investment risk to employees. The debate over Jindal’s cash balance plan could open this same door for Louisiana.
Andrew Biggs, resident scholar of the American Enterprise Institute, believes that public-sector pensions around the country face very significant funding shortfalls that will put state budgets under pressure for years to come. He argues that pension accounting methods that showed the true market value of these liabilities might have prevented these shortfalls from being accumulated in the first place.
But given the guarantees afforded to vested public-pension benefits, painful choices are inevitable. If anything, it’s that sense of urgency that may come to fuel Louisiana’s rapidly approaching debates.