State employees who were blindsided by Gov. Jindal’s announcement last week of proposed sweeping changes to the state’s retirement system have only themselves to blame; they simply haven’t been paying attention.
It’s been a long time coming and while the jury is still out on what will and what won’t be approved in the upcoming legislative session or what is or is not fair to longtime state employees is irrelevant at this point. There is a much larger problem to be addressed: a problem of nearly $6.5 billion in unfunded liabilities for the state employee retirement system, to be precise.
This is an issue that has been punted repeatedly by legislators past and present who were unwilling to make a hard decision and now change is no longer on the far horizon: it is upon us and it is inevitable.
As far back as 1989 a constitutional amendment was passed by the legislature and approved by voters to amortize the state’s unfunded accrued liability (UAL) payoff over 40 years on a level payment plan (adjusted for inflation and payroll growth projections).
That amendment, however, had one fatal flaw: it allowed the legislature to change the payment schedule by statute. One may as well have turned a fox loose in the henhouse or a child in a candy store.
The latter may be more appropriate since the legislature has a greater propensity to act like the adolescent when the state coffers are rife with revenue. Lawmakers wasted no time in tinkering with the schedule in order that they might fund local projects in the annual budget. The folks back home, after all, don’t care about what’s going in Baton Rouge as long as they get their community centers and golf courses funded.
Now, as we approach the 2029 deadline imposed by that amendment, the state is staring down the barrel of huge balloon payments.
Whether one likes Jindal or not, the problem with the state’s UAL for the various pensions for employees, teachers, school employees and police is no more his doing than the state’s next governor, whoever that may be.
But neither was the problem caused by state workers who now are being called upon to change their retirement plans in mid-stream to accommodate those legislators who in past years shirked their fiscal responsibilities in order to more easily facilitate their own political careers. It is patently unfair to ask rank and file state employees to pay the penalty for past legislative moral malfeasance.
That’s not to say that Jindal has the right solutions in his proposals; we have no way of knowing that at this point. It’s just that it is now his problem to wrestle with in the upcoming legislative session.
It is not likely that Jindal or his staff conceived of these reforms independently.
The American Legislative Exchange Council (ALEC), a conservative coalition of state legislatures, includes the reform of state pensions as one of its “Tools to Control Costs and Improve Government Efficiency” on its state budget reform web page: http://www.alec.org/publications/state-budget-reform-toolkit/.
Other tools specifically recommended by ALEC include the restructuring of state retiree health care plans, delaying “automatic” pay increases, adopting a state hiring freeze, embracing the expanded use of privatization and competitive contracting, establishing a state privatization and efficiency council and selling state assets.
Any of those sound vaguely familiar?
Several corporate members of ALEC have been identified as major contributors to Jindal’s political campaigns.
Of the 126 bills already pre-filed in the House and Senate as of Tuesday, 84, or fully two-thirds deal in some fashion or another with retirement. The breakdown shows that 36 retirement bills have been filed in the House and 48 in the Senate.
Some of the bills in both chambers are different versions of the same proposals, so some of the duplicate bills will be withdrawn before consideration.
Many of those deal with local clerks of court, assessors, sheriffs and municipal employees but just as many—or more—deal specifically with state employees.
Jindal said for now he is addressing only state employees and not teachers, school employees or state police.
Many of his proposals break long-standing promises made to state employees relative to retirement benefits and eligibility.
HB 53 by Rep. Kevin Pearson (R-Slidell), for example, stipulates that employees hired prior to June 30, 2006 may retire after 10 years and upon attaining age 67. Those hired after June 30, 2006 may retire after five years and attaining age 67.
The present law allows a state worker to retire after 10 years at age 60.
HB 56, also by Pearson, chairman of the House Retirement Committee, would increase employees’ retirement contributions from 7.5 percent to 10.5 percent for those employed on or before June 30, 2006 and from 8 percent to 11 percent for those employed on or after July 1, 2006.
But perhaps the bill that would sting the worst is SB 17 and SB 26, both by freshman Sen. Barrow Peacock (R-Bossier City). Each of those bills would change state pensions from a defined benefit to a defined contribution.
That means that instead of employees being guaranteed a set pension based on the current formula of three-year average salary times 2.5 percent times years of service, employees would contribute a predetermined amount to retirement with no guarantee of benefits. Such a program, which would react to market conditions, is similar to the 401K plan common in the private sector.
One bill, HB 55 by Pearson, would alter the formula for computing retirement from a three-year average salary to a five-year average, thus reducing in theory, at least, the employee’s monthly retirement check.
HB 61, also by Pearson, would require a one-time, lump-sum payment to employees with five or more years’ credit upon retirement. The employee may opt to take the lump sum or leave his account balance with the system and draw an annuity.
Because state employees do not contribute to, nor do they qualify for, social security, their retirement income would hinge solely on the uncertainty of their state retirement.
Louisiana Voice 
Keep in mind that in the private sector that employees have both their 401(k) plan AND Social Security and Medicare.
If State employees have only their state Defined Contribution plan and are not eligible for social Security and Medicare (or a state sponsored health plan) they will all quickly fall into abject poverty. One heart stent, or other “routine” surgery and their entire life savings through their “401(k)” will be gone. Then they have NOTHING for the rest of their lives. They will go on welfare and Medicaid which will continue to make them wards of the state just as they would be under a defined benefit plan but with never having contributed to the funding for welfare.
Folks MUST understand this when talking about converting a state retirement plan from a defined benefit plan to a defined contribution plan. This conversion has many, many nuances to it that must be considered. It is not a simple matter that is accomplished with addition and subtraction. It requires life and health expectancy calculations. Either that or the “Death Squads” will be state officials and NOT federal officials as alleged by those opposed to Obama care.
Many many thanks for your untiring work of exposing what is really going on in Baton Rouge. These plans are especially unfair to those workers who might be younger than 55 but have only a few years left to retirement (due to buying airtime for $$$ or just a really long service). There will be litigation. The workers may or may not win. Likely federal court is the proper venue as there are contracts issues as well as equal protection questions. Louisiana judges, being exempt under the current proposals (imagine that), can sometimes be a little too political, especially when dealing with a gov with about $14million in the bank – – they are, after all, politicians themselves. Some might say workers should organize. But, that would be an error, as it would give the gov one opponent to rail against in the media. Folks need to just make their concerns know early and often – this is going to be a really really long spring for state workers.
The commentary below was written by a former legislative staffer here in Louisiana who now resides in Virginia where they are looking at the same thing, Long but definitely worth the read!
Commentary: The coming public pension debate
By: By David Shreve | The Daily Progress
Published: December 08, 2011
» 5 Comments | Post a Comment
(originally published in The Daily Progress Aug. 28, 2011)
David Shreve
Like many other states, Virginia has apparently decided that it must undertake public pension reform. We are told that we cannot afford the current system, that a defined contribution or “hybrid” plan would be a more efficient alternative, and that the Virginia Retirement System’s 30-year unfunded accrued liability, resting now at approximately $17.6 billion, is a “deficit” that must be lessened or erased.
Despite some partisan differences on what constitutes necessary adjustment and the conspicuous leadership of the state’s most conservative voices, legislators on both sides of the aisle appear poised to introduce significant changes of some kind in the next legislative session. Doing nothing in this realm no longer appears to be a viable or responsible option.
If the vitality of our state’s economy is the principal concern, however, we must recognize that these claims rest on shoddy economic analysis and mistaken, even reckless, assumptions about the current system and its solvency or affordability. It can’t be made plain enough: there is no public pension funding crisis, it is illogical to think of a thirty-year unfunded accrued liability as a deficit that must be eliminated, and it is foolish and counterproductive to misapprehend the significantly higher cost-to-benefit ratio of the proposed “reforms.” Any shift to a defined contributions or “hybrid” plan would constitute an unequivocal setback for public servants and their families and for the entire state economy.
We must realize, first of all, that public pension benefits are not merely “costs,” amounting to deadweight losses for the state or for any citizen who does not receive them. Because the average annual benefit represents a low middle-class standard-of-living—currently around $20,000 for Virginia teachers and a little less than that for all state retirees—this implies that most benefit payments are rapidly and completely spent, moving back into the economy where they generate jobs, income, and additional revenue. At approximately 1.65 percent of our annual state budget, the state’s pension contribution is not only affordable but a sound investment worth enhancing, especially in a recessionary economy when sound private sector investments are always much harder to find. To comprehend just how sound and how worthwhile, take note of a 2009 study, conducted by Ilana Boivie and Beth Almeida, which found that expenditures made out of the $151.7 billion pension benefits paid in 2005-06 to 7.3 million retired employees of U.S. state & local governments supported 2.5 million jobs that paid $92 billion in total compensation, produced over $358 billion in total economic output, and generated over $57 billion in additional federal, state, and local tax revenue. Each dollar paid in public pension benefits to these state and local government retirees, in other words, supported $2.36 of economic output, and each dollar contributed directly by taxpayers to fund these benefits (as opposed to the larger portion funded by investment returns and employee contributions) supported $11.45 in total economic output.
Proponents of “reform” not only ignore these numbers and the genuine economic effects they represent, but also maintain that public pensions have to be reduced if only to align them with their rapidly eroding private counterparts. Even though this is very much like setting fire to your neighbor’s house because it is much more well maintained, this rationalization has been introduced and touted in every American statehouse, as if it carried a much more irresistible and compelling logic. It matters not that 401(k) plans were introduced only to supplement and not to replace defined benefits plans, that ongoing changes in the private sector model are a significant and entirely unnecessary source of middle class decline and overall economic weakness, or that the much lauded defined contributions plans increase costs relative to comparable defined benefits plan by approximately 47 percent—through reduced longevity risk pooling, a much higher fees-to-investment return ratio, and a less balanced investment portfolio. We are fooled into thinking otherwise, it seems, only because “reform” delivers dramatically reduced benefits and reduced economic vitality not all at once but in mostly invisible small steps drawn out over years and decades. And because decent public pensions carry undeniable benefits for the entire economy, the logic of this “reform” is actually worse still, like setting fire to this neighbor’s house only to see part of the burning rubble fall into and damage your own.
But doesn’t the staggering 30-year unfunded accrued liability still offer sufficient cause to “economize” on public pensions, regardless of what this “sacrifice” may entail for middle class security or general economic vitality? Pausing for a few seconds over this query, most citizens should recognize immediately the goofy and contradictory logic on which it rests. For if we beg the question in this manner, we make the claim that improved economic prospects can follow, directly, a reduction in overall economic activity and the replacement of an efficient public investment vehicle with a decidedly less efficient alternative. Moreover, even if we forsake economic soundness and focus instead on actuarial soundness, we are utilizing an estimate of long-term affordability designed not for permanent public entities but for private ones that can disappear, and which is comprised mostly of investment returns we cannot possibly predict (but which we can certainly undermine by ignoring economic soundness). To confirm such delusion, it’s probably also necessary to forget that capitalism depends always on an invest-or-buy now and pay later foundation, and to pretend that private investors can magically spring to life when public investment and related consumer demand falters.
To illustrate the point another way, it is not perfectly clear that the optimum pension fund balance is not zero. Indeed, until the 1970s, state pensions were generally funded on a pay-as-you-go basis with few hiccups and little talk of any pension funding crisis. While the maintenance of fund investments during a recession can usefully exploit market-timing advantages with significant long-term payoffs, these advantages can usually be surpassed by the returns to increased public investment during the same period, a payoff that can be magnified by maintaining or increasing fund expenditures while fund balances decline (even to zero or below). And while large state pension funds have also played a singular role in the still nascent reform of corporate bureaucracies and their many inefficiencies and corruptions, these reforms can be encouraged in many other, equally promising ways.
Even if states, foolishly, wanted to close completely their unfunded accrued (30-year) pension liabilities, the infamous “trillion-dollar gap,” cited by the Pew Center on the States, amounts to a mere $300 per household per year, three-quarters of which is covered by employee contributions and investment earnings. The remaining $75 per household per year, for which governments would be responsible, can be covered by very modest tax reform, a very small uptick in economic activity, or statistical error in the 30-year forecast.
The lesson should be clear: generous public pensions are not just affordable—they are essential components of prosperous modern economies. Any “reform,” based on their reduction and on the phony premises of a “pension crisis,” would be a significant step in the wrong direction.
Another friend wrote me about this and reminded me that….
“The thing that irks me the most about the UAL is that we passed a Constitutional amendment in 1989 amortizing the UAL payoff over 40 years on a level payment plan (adjusted for inflation and payroll growth projections). Then, because the amendment allowed the legislature to change the payment schedule by statute (not the ultimate payoff, just the schedule), the legislature, in its exquisite wisdom, started monkeying around with the schedule so they could fund the @#$% they wanted to fund in the annual budgets and now we face tremendous balloon payments as we approach 2029. Notice Jindal didn’t bring this key fact out, but it is the penultimate reason we find ourselves in this mess.”
Can I sue the State in forma pauperis? *-)
In all likelihood, there will be scores of lawsuits or at least a class action lawsuit filed by state employees.
For not honoring the contract?
Massive amounts of case law have decided that in most states (esp. Louisiana where benefits are guaranteed by the state constitution), that public employee retirement benefits are in effect a contractual relationship between the state and the employee and are therefore subject to the federal constitution’s limitation on state’s breaking existing contracts (with anyone, public or private). Yes, there will be (a) lawsuit(s), as his plan affects existing employees under 55 year of age, quite a few with 20+ years whose very futures are in jeopardy. I think plenty (most) of affected employees will be willing to organize and pony up donations for good legal representation. Only Bobbie Jindal can keep a promise by breaking the entire promise.
Just a postscript, it is interesting that editorial pages across the state, including the Advocate, Times of Shreveport, even the liberal-leaning Times-Picayune, and many others have jumped on the pension crisis bandwagon with the governor. No one is questioning his basic assumptions or the cure he suggests.
What irks me is the fact that both the house and senate don’t hesitate to increase their salaries whenever it suits them, but when it comes to the average state employee they will hold merit increases while the cost of living continues to to rise, our health insurance continues to rise and now to top it off they want to take the retirement we have worked for. Why must the average state employee always bear the burden to keep the state afloat? Some employees are entering the fourth year without an increase because of having to bear the burden of keeping the state afloat. Just today while preparing for work the news reports Jindal is telling higher education monies set aside for them would remain if the house and senate approve his proposal for the state retirement plan. He’s banking on the average employee not opposing any of his plans, but I as an employee think we should rally and rally strong against him and the representatives.
State workers have sacrificed so much only to be used once again! For the past 4 years no pay raises! Our retirement is already messed up because of the state supposedly saving money or bailing out the state. There must be a better way! We have worked hard for years! We chose to work for the State vs. the private sector – benefits or high salary! We wanted the benefits and sacrificed for years and now to thinik all for naught! This is almost unbelieveable! I don’t know how we will get thru the spring! Why is it that state employees are always the pone? Why can’t the constitution be changed so that we can all participate in the cost savings – more than just healthcare and education. Agriculture continues to waste more and more money with some of their programs while healthcare and education suffers. Look at the whole picture and find another way! It will get very ugly for an already ugly state. Tell your kids to graduate and get the hell out of Louisiana! Don’t be like us!
There is another way. It is called a “recall.” Although employees of the State cannot start it or solicit others to sign it, there are at least 54,000 that will most definitely sign it, not to mention 4 or 5 of their close family members affected who would sign. Pretty quick, the numbers would add up!
Now I am not starting one or soliciting anyone to sign one, mind you. I am simply stating the facts. If one of you fine concerned citizens out there feel the need to start one I am sure it will take root!