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Official uses misdirection in downplaying LA pension reform

If we know nothing else about government, we know that bureaucrats always stump for more resources associated with their agencies . This explains several disingenuous remarks made by Louisiana State Retirement Systems Director Cindy Rougeou to members of the press regarding reform efforts that would downsize the power and resources of state pension funds.

They came as part of her stumping for Amendment 2 that voters will face in less than two weeks, which would mandate some portion of forecast budget surpluses to pay down the unfunded accrued liability of the four state retirement funds, which hold and manage money from defined benefit pensions in which most state employees participate. While she correctly voiced support for that measure, she proceeded then to try to explain away the responsibility that policy-makers and retirement officials had in creating the over $18 billion hole that must be wiped away according to the Constitution by 2029, in the process trying to cast doubt on proposals to assist in that made by the interest group Blueprint Louisiana. A list of these erroneous assertions made by her and the real facts concerning them is instructive.

Assertion: “The problem is the debt, not the benefit being earned.” This she argued because the state did not pay enough into the system in the past to make sure projected payouts would be covered.

Fact: The state contributions did not cover projected costs because benefits were too generous in the first place.
Louisiana infamously has one of the most generous set of benefits among the states and certainly when compared to the private sector there’s no question they are more than market forces would produce. Had they not been so generous, the gap (oddly, she calls this “debt” when in fact the systems hold positive balances in the billions of dollars) would be smaller or reversed. As the state has done so often, it makes grandiose promises for which it cannot pay (here’s a telling example), benefits being one of them. The problem is the benefits; they were and are too generous.

Assertion: Reducing the number of state employees in the defined benefit regime, about 4,000, during Gov. Bobby Jindal's term, actually has aggravated the problem. This is because the UAL is fixed and part of it can get paid down through forced employee salary contributions; reduce the amount of those contributions because of fewer employees and, relatively speaking, the state portion goes higher.

Fact: This is misdirection at several levels. First, which she did acknowledge, the state is saving money in other areas by paying less total salary. But, second, the money that comprised employee contributions was coming from the state anyway so it was merely a pass-through effect – pay into the funds indirectly by first taking state money, giving it to employees, then immediately taking it for the funds that can be used to draw down the UAL, or directly by skipping the employee because of position reductions to chunk into the funds in order to draw down the UAL; it’s all the same. Third, this view ignores the fact that for every job reduced the state has no obligation to pay its proportion into retirement funds, generally roughly equal to that coming out of the employee’s salary, saving money here although again it may be taken anyway to pay off the UAL. Finally, with fewer employees, fewer unsustainable obligations are created in the long run that would have to be funded. So, it may be the case that the state’s direct payments into the funds is lower with fewer employees, meaning in a relative and proportionate sense that the UAL becomes greater to the state, but in an absolute sense it saves more in the present and future because the additional funds it must have appropriated to make up for these monies is less than those saved by doing this across the board.

Assertion: Switching to a defined contribution system for current employees and requiring new employees to participate in Social Security would actually cost the state more money and do nothing toward paying off the UAL.

Fact: In the short run, starting up a system where employees and the state pay into self-managed funds will cost additional money, and backing out payments into Social Security rather than sending them to state funds has a neutral effect, with neither affecting the UAL now. But in the future, a defined contribution system would have a positive impact on the UAL because the monies that would have gone into the funds creating the future pension obligation no longer would have been insufficient. That is, going forward the state would have to match sufficiently into private accounts and none of these monies would create future obligations that could be increased by fiat. Indeed, money would be saved in the long run because providers would pay the state for contracts to offer retirement products and the expenses related to managing the funds, as they grow smaller, would decrease. So these will do nothing for the current UAL, but in the future they would prevent the UAL from increasing more than the current system would trigger.

Assertion: Lowering expectations for returns on investments “would have the opposite effect” because the state would have to contribute more to the systems.

Fact: Part of the reason the UAL has grown is because the systems set unreasonably high forecast returns on investment – 8.25 percent, where Rougeau's system, for example, has averaged only 5.5 percent growth since 2005. That creates the false impression that the state does not need to contribute as much as it should. Having a realistic expectation of return on investment means policy-makers cannot avoid responsibility for paying more into the system on the hopes that higher returns obviate part of the portion they really need to allocate. This assertion entirely misleads because if the state has to contribute more anyway, why not have it do so up front instead of missed targets delaying this realization and therefore payments that grow over time?

Assertion: Changing governing structures that consolidate boards and put more system non-members will not improve performance, because there is no proof that “bigger is better” or that non-members can do as good of a job because they aren’t as committed personally to system success.

Fact: This red herring ignores that expertise trumps lack of expertise and the inefficiency costs of multiple systems. Fragmented systems (not just among the four state systems, but among around 20 other “statewide” systems that run funds for other state and local employees) create the potential for less expertise to be placed on governing boards, with requirements of those holding these spots be representatives of the employees covered and system members, and needlessly drives up costs by increasing the number of investment advisers and contracts. They’re all doing the same thing, investing money, so why not combine forces for efficiency? And most states already follow the model Rougeau questions.

In the final analysis, forces opposed to changing the current system do so because the more money they control, they more powerful they can feel, and it offers more chances for people to feed their egos by being part of it. Policy that directs money out of the hands of the state and allows individuals to make their own investment decisions for the future and in the present creates a more efficient and realistic infrastructure dealing with pensions will save the state money going forward, despite the desire of special interests inside government that want to keep things the same.


Gene Mills said...

So you Favor amend #2?
What are your recommendations on other amends?

Jeff Sadow said...

Indeed I do, but I would be wary of the rest. A post about that will come out later in the week.