Hike in state employee retirement contribution justified

At its board’s next meeting within two weeks, Louisiana’s State Employees Retirement System will discuss whether to raise the percentage contribution of salary for some, presumably defined benefit program members of the state government workforce, as announced by the Gov. Bobby Jindal Administration, from 8 percent to 11 percent. It’s an action way overdue.

Despite a constitutional imperative that the state must rid itself of its unfunded accrued liability in its retirement accounts by 2029, the state has moved slowly on securing funds to do so. For this fiscal year, agencies had to budget $690 million to stay on schedule to make this deadline, and this soon will rise to $1 billion a year. Depending on the system, extra amounts set aside to handle the problem – a result of overgenerous promises relative to revenues being collected to fund them – for each system equals to triples money required just to pay for current obligations, an added expense anywhere from over 17 to nearly 30 percent, depending on the system, of base salary costs.

To reduce this sapping of funds that otherwise could go to pressing priorities such as health care or higher education, both facing significant cuts for next fiscal year, only two things can happen: either or both the rate of return on invested money has to increase, which to make up the UAL ($18 billion or so) by the deadline would be beyond any reason, and/or the minimum amount employees (in the defined benefit plan; none of this applies to the defined contribution plan) kick in must rise (the state’s portion, which can be as much as roughly matching currently the employee’s contribution if not much higher, if rising would add nothing since it already is paying the difference). The Administration’s choice will draw flak because it essentially means a reduction in take-home pay for those employees.

But we have to recognize the privileged position Louisiana state employees relative to those employees in the private sector. Legal requirements have the state crank out an attempt annually to gauge relative state employee compensation vs. the private sector, but this has characteristics of studies in this area that are relatively unsophisticated and therefore misleading and, perhaps not coincidentally, shows Louisiana state employees underpaid. In particular, it does not factor in the pension risk cost borne entirely by government (but entirely by employees in the private sector), the higher value of job stability ensured by the civil service system (because it is so difficult to discharge a bureaucrat for cause despite low performance), earlier retirement ability, the tendency for government to hire less productive workers for the same job as in the private sector, and greater benefits packages not included in the state’s analysis including typically much more generous leave/holiday and health care benefits (for example, few private employers pay any portion of these in retirement while Louisiana picks up as much as 75 percent of its retirees’ costs).

More sophisticated, thereby more valid and reliable analyses, which unfortunately do not isolate Louisiana’s results, shows state and local employees in general enjoy an advantage in total compensation. (An excellent example of such analysis, conducted on the federal government, is here, while such work described for popular consumption is here.) So it is reasonable to assume that the same applies to Louisiana’s compensation regime.

Thus, compensation for Louisiana civil servants can be demonstrated as generous and able to be reduced. As well compared to the private sector, the contribution percentage is low. As of the latest figures available, the typical private sector worker, if dealing with defined contribution plans which dominate in that sector, must pay over 18 percent of compensation and has only about a 56 percent employer match. Having state employees increase their contribution, in the relative scheme of things, is not much an unreasonable request.

Without a pay raise, regardless of the reason, this hike will be a one-time pay cut (although it bears remembering that for over two decades until last year almost every classified state employee got a four percent raise annually, regardless of the state of the economy). However, considering the relatively overcompensated status of Louisiana employees generally in the defined benefit program and the burden that otherwise would be placed on Louisiana taxpayers, the vast majority of whom are in the private sector that has faced recent economic retrenchment, the three percent increase is not too much to ask to deal with a ticking pension time bomb that threatens the resources of all Louisianans.