Retiring the debt
|Gov. Bobby Jindal proposes pension changes that would help Louisiana rein in the costs of its retirement programs, which currently are $18.5 billion in the red.|
If you're not one of the 40,000 workers in the state retirement system, then Gov. Bobby Jindal's recently announced proposal to overhaul the massive state pension fund in order to get a handle on its mounting debt problem might not be on your radar.
But it's a problem that affects every Louisiana resident, state employee or not. The state's four retirement systems are $18.5 billion in the hole, and servicing that debt comes out of the general fund. What's worse, the red ink is growing every year at a time when the state budget is being squeezed ever tighter.
“People have no idea how big a deal this is,” says Rep. Kevin Pearson, a Slidell Republican, who is handling some of the governor's major reform bills on the retirement system in the upcoming legislative session. “We have an $18.5 billion keg of dynamite and it is huge. If we don't do something soon, it will be dire.”
While few people take issue with Pearson's assessment, the disagreement comes over what to do about the Unfunded Accrued Liability, which is the gap between what the state has promised its retirees in benefits and the actual assets it has to pay them. Jindal's proposed legislation would keep the debt from getting any bigger by upping the retirement age and increasing employee contributions.
Not surprisingly, those proposals are meeting with resistance. But the real opposition is coming from the fact that Jindal's plan targets only one of the four retirement systems, the Louisiana State Employees' Retirement System, which accounts for just one-third of that $18.5 billion debt. What's more, even if the governor's entire package is implemented, it will only pare down the existing debt by $500 million, or less than 3%.
“It's a great start, but even if it's successful it doesn't eliminate or even reduce the current debt problem,” says Jim Brandt, retired director of the Public Affairs Research Council, who kept an eye on the state debt for more than a decade. “It singles out one of the four systems and is really just a plan to keep one-third of the problem from getting worse.”
The UAL is a decades-old problem that began when the state retirement systems were created in the 1930s and 1940s. Back then, the decision was made to grandfather existing state employees who had never made contributions toward their pensions, which meant the system was debt-ridden from the outset.
The debt grew over time, but lawmakers didn't get serious about addressing it until the 1980s, when they created a back-ended payment schedule to start paying it off. Like an interest-only mortgage, the payment plan saved the whopper payments until the end, which is now approaching.
This year, the state owes nearly $2 billion on its $18.5 billion debt. None of that amount even goes to paying off the principal on the debt; that doesn't start until 2015. By the end of the decade, servicing the debt could top $3 billion unless something is done.
“The balloon is inflating right now and the payments are escalating year- to-year and rising rapidly, and all that has to come out of the state agency budgets,” says Robert Travis Scott, executive director of the Public Affairs Research Council. “When that happens, they have less money to spend on their other critical core services.”
In recent years, the Legislature has appropriated $60 million to help pay down the UAL and dedicated as much as 10% of nonrecurring revenues to it. But that's really just a drop in the bucket, and the proposed package for the upcoming session represents the first big effort at reform.
Among the most significant changes is a bill that would increase the retirement age to 67, which would bring it in line with Social Security and save an estimated $270 million, according to the Jindal administration. Though workers would not be forced to continue working until age 67, their benefits would take a substantial hit if they retired early.
For instance, actuarial tables provided by LASERS show that a 54-year-old state worker who earns $60,000 and plans to retire at age 60 after 36 years on the job is currently eligible to receive more than $54,000 annually in benefits. Under the new plan, those benefits would decrease to $25,500 if the employee retired at 60.
CASH AND CARRY
Debt carried by the state's four retirement systems:
Teachers Retirement System
Louisiana State Employees' Retirement System
Louisiana School Employees' Retirement System
State Police Retirement System
TOTAL $18.5 billion
LASERS officials argue the change would hit longtime state workers hard, particularly those who are close to retirement age and have made plans to retire at age 60. The administration counters that many workers today choose to stay in the workforce longer and that they would still be eligible for retirement benefits at 60, just at a reduced rate.
Another key part of the governor's package would increase employee contributions to 11%, up from the 8% they contribute now. It would also amount to several hundreds of millions a year in savings, according to the administration. But LASERS officials counter that it's unfair to make current employees pay for problems that were created in the past.
A third bill would base retiring workers' benefits on the last five years' pay, not the three highest-earning, as is currently the case. Its estimated savings amount to $250 million.
The final part of the governor's plan would create a new type of retirement fund for all new employees in the system. Known as a cash balance plan, it would create a portable investment account for each employee that would be similar to a 401(k) but would only guarantee that which the state would be able to pay over time.
“You'll hear the argument that we shouldn't move from a defined benefit plan,” Pearson says. “Well, I say, ‘Why not?' Benefits are guaranteed by our (state) constitution. But we can't guarantee more than we can pay. … And if we don't do something, the whole system could blow up.”
If the reforms are so desperately needed, why is just one system being singled out? That is expected to be one of the biggest arguments the administration and its supporters face as they try to pass the various bills in the session.
Highlights of Gov. Bobby Jindal's recently announced proposal to overhaul the state pension fund:
• Increase the contribution rate charged to rank-and-file state workers for their retirement from 8% to 11%
• Calculate the monthly retirement payment on an employee's last five years of salary, instead of three highest earning years
• Increase the retirement age to 67 before a person can receive full benefits
• Create a portable investment account for all new employees that would only guarantee what the state would be able to pay over time
LASERS is responsible for just $6.5 billion of the $18.5 billion debt. The larger Teachers Retirement System is carrying $10.8 billion; the Louisiana School Employees' Retirement System, which covers noninstructional school employees, $904,000; and the State Police Retirement System $339,000.
“When you look at the UAL, you see that it covers four state systems, some of which include specialty plans with much higher benefit levels than that earned and paid for in large measure by the rank and file,” says Cynthia Rougeou, LASERS executive director. “The administration's plan targets employees who are least able to speak up in opposition.”
Observers say political considerations no doubt dictated the governor's decision to leave TRSL out of the overhaul. With K-12 education reforms topping the governor's ambitious agenda for the session, it wouldn't make sense to go after teachers on two fronts.
“Biting off another big piece of change that would impact teachers might be a lot to do all at once and may not be possible to do all at once,” says Barry Erwin, executive director at the Council for a Better Louisiana.
For his part, Jindal says, “We want to first focus on making sure that no child is trapped in a failing school” before taking on TRSL.
Another potential pitfall with the proposed reforms is that none of the bills takes a significant bite out of the existing debt. Jindal says his plan would reduce the UAL by $500 million and that it would slow the rate at which the debt is growing. But is it doing enough?
“It really doesn't address the existing debt,” Brandt says. “The state is still on the hook for that $18.5 billion.”
Pearson acknowledges as much, but says the state can do very little at this point but nibble away at what has built up over time. Going into the session, he's hoping to convince his colleagues—supporters and detractors alike—that the state has no choice.
“People will sit back there until the levee crashes, and then they'll say, ‘Oops, I was wrong,'” he says. “Well, we can't sit back and wait for that to happen.”
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