How to try retirement reform again to avoid coming crisis

Hopefully, it won’t take a massive crisis to get Louisiana policy-makers to realize the necessity of pension reform – but wait much longer and that imperative will force itself onto the state.

California exemplifies what happens when policy-makers ignore a pending crisis of this nature. The state and many of its political subdivisions in flush times became extremely generous to government employees with the people’s resources, creating a compensation structure that made these employees significantly better off on this account than those in the private sector paying for it. But good times don’t last forever, especially when decades of imprudent state fiscal management combine with periods of the same (such as currently) from the federal government, and now local governments are turning the spigot to ease the flow to public employees as pressure builds on California’s state government to do the same.

Louisiana isn’t yet to that point, but the situation parallels California’s and today’s present in the Bayou State reminds of the Golden State not long ago. Similarly, Louisiana’s employees are overcompensated relative to the private sector for jobs doing similar tasks. Similarly, a huge liability grows as a result that threatens to consume a large portion of future state budgets – with certainty if nothing changes as the Constitution mandates expenditures to reduce the unfunded accrued liability to zero by 2029. And the crisis might come sooner, with a predicted draining of funds to pay liabilities by 2020.

While some observers mused that Gov. Bobby Jindal’s inability to get passed legislation that would eat into the $18.9 billion UAL signified at best a mediocre session result, it must be remembered that his allies almost succeeded in getting the two measures designed to do the most in this regard to his desk, from a baseline of the year before where half-hearted attempts to do the same got nowhere. And he did get through one important measure, one that puts employees hired after Jul. 1, 2013 into a cash balance plan that may not contribute to the UAL in the future.

The problem is, this begins to “save” at the earliest only beginning Ju1. 1, 2023, does nothing to reduce the UAL until then, and may even increase it. If either (probably both) of unrealistic returns expectations or prolonged poor overall investment climate happen, this plan also may force the state into dips into taxpayers’ wallets in some years. Regardless of this new plan’s existence, the present UAL threatens to balloon further under the old that may last another half-century or even longer unless changes that ensure employees pay their fair share for relatively cushy benefits get made and those benefits are brought in line to a realistic value congruent with that observed in the private sector.

This means Jindal and his allies must try again but, more importantly, succeed. Making the task more difficult (and also reflecting how the near-miss of this year was even more remarkable for the progress made in getting that far with it) is the oversized condition of Louisiana’s and its local governments, with their relatively high per capita numbers of personnel and costs. This gives government employees disproportionate power to lobby and voting presence to pressure policy-makers to maintain their plush benefits.

Still, they must try, and now or otherwise permit a California-like crisis to engulf the state. Five tactics can help get a reform package across the goal line next year:

1.      Propose combining as many systems as possible to create efficiencies of scale. A small amount of that was done this past session, but there’s no reason for the state to have 20 different retirement programs, each with separate funds and governance mechanisms, and some badly managed. Consolidating can save some funds which then can be put to reducing the UAL and likely improve performance in the aggregate, pressuring down future increases to the UAL.

2.      Address reforms to all funds that do not serve hazardous duty personnel (the risks of their jobs entitle them to generous benefits). In a political decision to increase chances of education reform passage, Jindal did not propose changes that would apply to most members of the Teachers Retirement System of Louisiana, which led to queries about consistency and unfairness in applying changes only to some. With those reforms now in place, there won’t be distractions to detract from taking all of this system into account (and with the other big one, the Louisiana State Employees Retirement System, comprising the vast majority of the UAL) plus all others. This can piggyback onto system consolidation.

3.      Better publicize the case for reform. Almost none of the Louisiana public understands the gravy train of compensation state employees get relative to their private sector counterparts. Understandably, the Jindal Administration and its legislative allies do not want to come off as seeming to be “against” this large voting bloc, but a recitation of the facts may be the only way to persuade the wider public to pressure recalcitrant legislators (unlike in California, the state cannot fall back on an initiative procedure). Reformers need to have accomplished the first reliable and valid compensation study and publicize its results, along with other salient information about the relatively small contributions employees make, the relatively generous ones the state (that is, taxpayers) makes, the cornucopia of paid vacation days, low-cost high-value health insurance available, etc., to have the public understand the generosity involved and of the need employees to pay their fair share for such largesse.

4.      Link employee pay raises to reform. One of the final iterations of the reforms that did not pass tied the implementation of reform to reception of a pay raise to offset, and politically shrewd move to defuse objections that increasing employee contributions was a stealth pay cut in an environment where raises had not been had for most for three years. Jindal, with plenty of justification given a national economic environment that continues to put a lid on state revenues, can plan for no raise again next year unless reform gets passed, in a way that creates an immediate revenue-neutral situation for employees and moot this objection, while providing a carrot for employees to drop objections with the implicit message that no raise will be forthcoming until reform is achieved. (This also has an immediate impact on curtailing the UAL; the amount of the raises won’t have to be matched by the state.)

5.      Link reduction in the size of government to reform. In order to save bucks to offset the burgeoning UAL, Jindal credibly can call for continued lopping off of state government jobs. He can argue that if the UAL’s growth rate is curtailed through passage of reforms, the state can afford to keep more people on the payroll. Having their jobs threatened for reasons of adverse fiscal conditions might convince some opponents in the bureaucracy to sign on if that means being able to free money to save them. (And, as in the above, laying off employees limits UAL growth in the short term.)

Louisiana doesn’t need to let itself become like California. By adopting the above strategy, reformers can prevent this, given this example strengthens their resolve enough to do so.