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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.


lsuman said...

What does the Office of Group Benefits have to do with retirement contributions by employees? Shouldn't that be taken up by the respective retirement boards? And how do we stack up against other states? Wisconsin's state employees are going ballistic because the Governor wants to raise their retirement contribution to 6%!

Jeff Sadow said...

Correct, for some reason I put OGB rather than LASERS. That's been corrected.

State by state comparisons are pretty difficult to find. There is another BLS report focusing on state and local government, but refers to rates only in generalities. I was able to find no document that lists such rates across the states, so the average that you can derive from that BLS report probably is the best you can do.

lsuman said...

I see the Governor has made this official in his Executive Budget, increasing the employee contribution to 11%. That effectively cuts employees in LASERS pay by 3% and as I appreciate excludes those in the other retirement systems (which is totally unfair). Considering we've already sacrificed through layoffs, furloughs, and foregoing pay raises for as much as three years(depending on your agency and classified vs. unclassified), this is placing far too much on the backs of state employees (low-paid civil servants especially). And even though the Commissioner stated that our benefits packages are competitive with other states, it would be interesting to see the facts on that.

Anonymous said...

You're kidding right? Hard to get rid of employees? Only if you don't know what you're doing. If you properly document you can get rid of a non-performing employee with little problem. If they file a suit, if you did it right they shouldn't have a leg to stand on.

As for the increase in pension contributions, I'm fine with them doing it however you also get what you pay for. You start increasing the taxes and not increasing the pay, people WILL go to greener pastures and you'll end up having a LOT less suitable people working in the public sector should the economy begin to improve. The "safety" of a state job is an illusion and I've see a LOT of people leave it for better compensation in the private sector. I've seen some of the people in charge of some of these state programs, a lot of them are barely acceptable. You get someone worse in there and as much money as I feel the state and federal government already wastes, it's just going to get worse. From what I've seen you'll just ending up paying for it in a different way with worse services. Pick your poison.

Just my $.02.

Anonymous said...

Can you tell me the difference in salary of the private sector versus state employment? That could be why the private sector pays more into retirement. As a state employee I have to say, as of January 1st of this year my take home pay dropped about $40.00 per check, I haven't gotten a 4% raise in two years and I can't remember the last time I received a cost of living raise. Everything is going up (gas, food, etc...) but my pay check is NOT. The perks (holidays, and leave, etc.) is compensation for the low pay some state employees earn.

Anonymous said...

I am a third generation state employee, although I worked for the private sector from age 18 to 34. I was offered employment with the state at age 19 but I could not have survived on the pay, since it was 33% less than what I was making with the private sector. Possibly the workers of the private sector make less than state employees in some companies but the company (owners) are making much more than the average state employee. I could still go back to the private sector with a substantial increase in pay but I already have 16 years invested with the state and I would be on call with the private sector. At the rate of these changes, if the state wants the work to get done, it will eventually cost much more for substandard work. I know the state pay consultants more to do the same job as it would cost to do it in house. When there are no more state employees available, the cost of the private sector will escalate even more and the state will be totally dependent upon them. It has already begun with the lack of state employees and we are using consultants more than ever. When it gets out of hand and the state is faced with the question of letting needed projects go uncompleted or pay the private sector what they demand, then what? Tax payers will pay it and I may take an early retirement to open my own private business to take advantage of the situation, so I am safe but what about all of the other state employees that have dedicated their life to working for the state? They will be on the welfare system. Again costing the tax payers. Why don't they drug screen welfare recipients? I am drug screened, so I CAN work, so they should be drug screened to get free money. I bet over half would fail, freeing up state monies. Could it be because they are voters and some of our elected officials don't want to lose their vote? I have to believe most of the state problems are due to politicians allowing their own welfare come first with the state being a distant second because drug screening welfare recipients is just one of many ways I could "plug the hole" and I am just an average guy, so I have to believe our government and company know what is right but refuse to execute it for lack of personal gain.