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26.1.12

Fortitude needed to complete needed retirement reforms

There’s not much new to recommendations made by Gov. Bobby Jindal to reform Louisiana’s retirement benefits. All salutary ideas, in the past the Legislature had faltered in passing them into law as the state’s pension crisis became more acute. Thus, we may expect to hear the same tired and inadequate defenses supporting the present regime from special interests as previously, even as it is imperative for pro-reform forces to spread the truth about the situation and succeed in getting the provisions enacted.

Jindal argues, in legislation that will have to be filled Friday in order to meet the 45-day cutoff and advertising requirements of legislative rules, that most new entrants into any of the state’s four comprehensive retirement systems that they go to a modified defined benefit plan, reform the defined benefit plan under which most state employees and retirees now are covered so that retirement happens later to mirror changes in Social Security rules, base defined benefits on a five-year rather than three-year average, grant cost-of-living increases only when sufficient earning to cover them have occurred, increase employee contributions by three percent, allow existing employees under the defined benefit program to enter the new one, called a cash-balance plan, and merge the two largest plans.

Part of the program would address the burgeoning unfunded accrued liability, at $18.5 billion for those four statewide plans and which is required to be at zero across all programs by 2029, by increasing the retirement age, the contribution rate, and restricting cost-of-living increases. The remainder would simply slow its rate of growth by putting many new hires into the cash-balance plan, which would be invested by the existing systems with a guaranteed value of no less than the contributions from the employee, and is portable except that moving to a new job would forfeit the state’s contribution (generally about equal to the employee’s but in some case much higher) and investment earnings.

Switching from the defined contribution to the cash-balance scheme will ameliorate some complaints that the vagaries of investing might bring lower returns than with the payout from a defined benefit plan, if not actual losses, exacerbated by unfortunate market conditions at the time of contemplated retirement. These concerns are overblown, as even a very low-risk strategy still would create a decent retirement salary at even the lowest salary levels, and other incentives to produce a more efficient workforce get excised as well by this approach, but that promise should obviate perhaps the biggest complaint about previous reform attempts based upon defined contribution, although it will reduce the effectiveness of whittling down the UAL.

Still, the increased contribution rate, the five-year base on which to compute benefits, and the retirement age rise will draw the ire of interests claiming to represent state employees, including unions. We will hear many unfounded claims about how it is unfair to state employees, when in fact the data show Louisiana state employees generally enjoy a gravy train of compensation compared to private sector employees doing similar kinds and amounts of work in their jobs. It’s only just that they pay their fair share, and these bills help rebalance the favoritism presently shown to government workers over taxpayers and the citizenry.

While plenty of evidence exists to show that much more could be done in the way of merging systems, something is better than nothing, especially in preventing abuse and inferior decision-making. Opposition here will come from the systems getting merged, whose appointees to their governing boards will not like losing this perquisite, whether that merging likely will produce better gains and save expenses.

The fight will be fierce, but a more reform-minded, more conservative Legislature likely can succeed, with plenty of backing from Jindal, in getting beyond the baby steps of the past. Failing is not an option here, especially when implementation this upcoming fiscal year of these measures will save nearly a quarter of the $2 billion a year tab for paying down the UAL in just this upcoming year. Let’s hope Jindal and the rest have the stomach to see this through.