Data show LA state workers must make up for mistakes

Now at the plate for Louisiana policy-makers, it’s retirement system reforms. Supporters argue they are needed to put shore up a shaky and unsustainable financial situation, while opponents claim they unfairly target the compensation of the state employees involved. The latest data show the reform case has greater validity, and points to change needed beyond the current batter.

The changes for most current employees would increase paycheck deductions for retirement pensions from eight to 11 percent in order to finance the growing unfunded accrued liability of the Louisiana State Employees Retirement System, extend out the regular retirement age to 67, and use a five-year rather than three-year average to compute pension benefits. In large part, opponents express qualms in that they assert state employees are relatively underpaid to what they should be, and that if any future deficit would arise in the ability to pay pensions, it is the responsibility of the state, i.e. taxpayers, to come up with the “promised” remuneration rather than employees contributing more to their own retirement savings. To some degree, the arguments are related; because state employees are “undercompensated,” therefore it is the duty of the public to make up any shortfall.

However, the data point to the opposite conclusion. While no comprehensive study has looked at Louisiana specifically, the most recent work from 2009 by U.S. Bureau of Labor Statistics economists, Congressional Budget Office staffers, and researchers in academic settings shows that in measuring total compensation in comparing jobs of similar duties, all of federal, state, and local government employees are overcompensated compared to the private sector. In the federal instance, a retirement package judged 3.5 times higher than that of the typical private sector worker doing the same tasks led to a 16 percent premium in total compensation. Without even factoring in retirement benefits, salary and current benefits of state and local government employees nationwide are 10 and 21 percent higher, respectively, than private sector employees doing similar work. This confirms differentials observed in other studies and data of years past, and it would be highly unlikely that Louisiana’s data were skewed much lower.

Including retirement benefits from defined benefit plans, under which most Louisiana employees have theirs administered, it’s easy to understand how the system was made so overgenerous and pumps up state employees’ relative compensation even more. This is because for decades LASERS has assumed a return on investment of 8.25 percent. In other words, to meet total pension obligations, it was assumed over the long term that enough money would be collected by the eight percent standard that an 8.25 percent return on it would leave the system fully funded. In essence, this means, unlike with their private sector counterparts who have no guarantees, state employees in this system were guaranteed an 8.25 percent return on their investments no matter what, and anything less than that would be offloaded to be made up not onto them, but by taxpayers.

Predictably, these returns were not realized. Since 1998, the average annual return on LASERS’ investments has been only 4.92 percent. Meanwhile, the average annual increase in total benefits paid out has been 7.55 percent, so it’s easy to see why the UAL in that system increased 225 percent over that time span from around $2 billion to $6.5 billion. Ironically, had LASERS simply bought and held the Standard and Poor’s 500 index, it would have added nothing to the UAL with this index’s annual return of 7.68 percent over that time span. As a result, only recently did the Public Retirement Systems’ Actuarial Committee make even a very slight bow to reality and lower the expected rate of return to 8 percent – costing taxpayers an extra $32 million annually just for the quarter-point.

Simply, the state made faulty assumptions because it was too generous to employees and wanted to avoid angering he citizenry by calling upon it to make up for the consequences of this shell game. It’s only fair that with such generosity to themselves that state employees do their share to avoid the negative impact of fiscal imprudence, even as taxpayers will continue to foot the majority of the bill for these mistakes.

For the future, policy-makers need to base policy on realistic rates of return and to find ways by which to achieve them. They also might insist on genuinely useful data by which to make decisions; the current method of reporting on compensation comparisons with the private sector suffers from its lack of inclusion of nonpecuniary benefits and failure to compare by tasks. As for the issue at hand, policy-makers need to keep these facts in mind when deliberation begins soon on these needed changes.