Sour grapes aren’t reason enough for taxpayers to make up for the choices made by whiny Louisiana university faculty members, and hopefully the legal system won’t put taxpayers on the hook to gratify them.
A couple of such individuals have filed suit to reverse their participation in the state’s optional retirement program (ORP) and force their transfer into the long-existing, heavily underfunded defined benefit program (DBP). This has come after legislation to accomplish the same has gone nowhere in the Legislature.
With good reason. The ORP takes both the employee’s portion of salary that goes to retirement, typically eight percent before taxes and matched by the state, and allows these to be invested by the employee in vehicles chosen by the state’s contracted investment advisers from which the employee typically has several choices. This may follow the employee to other employment and upon retirement then may be drawn like an individual retirement account from principal and investment earnings.
The DBP acts as a traditional pension, where the eight percent portions are invested by (in this case) the Teachers’ Retirement System of Louisiana but give a fixed payout for life (although other options exist) upon separation, provided having a basic number of years of service according to age (vesting), determined by three or five consecutive salary years of the employee’s choice (usually the last served) and number of years employed and/or age. It is not portable, so the employee if leaving state service if not vested takes only his portion put in and if vested also takes out the state portion although potential tax complications can arise.
All things equal, often the DBP proves more lucrative because of the Ponzi-scheme like nature of Louisiana pensions where, because of unrealistic assumptions and over-generosity with taxpayer dollars, the system has become dramatically underfunded (having less than 74 cents on the dollar for future projected payouts), it can pay out more for the same dollar taken with future workers and taxpayers making up the difference. Legislation to shift contributions from the ORP into TRSL, with the employee making up any gap, has failed because actuaries identified these issues and, declaring a net cost increase for the state in the future as a result, causes passage of that kind of legislation only by supermajorities.
So, it’s off to the courts with accusations that the state cheated those in the ORP by diverting funds for investment to pay off the unfunded accrued liability, it can’t do it anyway because the program doesn’t meet legal retirements for Social Security exemption (typically, state employees don’t pay into that), and that the ORP is misrepresented. It seeks to let affected members into the DBP at the point they would have been financially had they not selected that.
I don’t know the suit’s details nor can I render a legal judgment of the Social Security exemption although the ORP appears to fulfill the safe harbor requirement to qualify it. I can tell you as having been one of the first state employees to elect for the ORP that my financial statements from it don’t appear to support the diversion contention and that its aspects seemed crystal-clear to me when I signed up and haven’t been mispresented to me since.
There are two main reasons why to go with the ORP. First is the portability, wherein it conveys extreme generosity. In fact, in Louisiana you have five years after hiring to make a final decision of ORP vs. DBP. That timing isn’t accidental, as typically after five years a tenure-track employee knows whether the school will offer tenure or you’ll have to hit the road, likely out-of-state for another academic job.
Then there’s the opportunity to build up a retirement nest egg that exceeds the DBP payouts. People in the ORP I know well enough to talk about the issue aren’t complaining. And there’s no real trick to ensuring a healthy payout.
Let’s take my history as an example. Let’s say I retired at the end of this semester after 32 years. If I had been in the DBP, I would make about $3,000 a month, never having made as much as $50,000 a year for my nine-month contract.
Now let’s say that my entire experience in the ORP, with an average salary of $36,000 over that time span, I invested only in a money-market option (the cash rate over this period being a lousy 2.34 percent), if I expected to live to 85 (actually, I expect to go a lot farther than that, but this still is about five years better than the national average for males) and still kept it all in cash at historical rates while removing an equal amount each month, I’d have it pay out just over $1,250 a month for those 288 months.
That’s poor in comparison, but of course I didn’t do that. If you’re that risk averse, take the DBP deal. But, with the magic of compounded rates of return, if you took just a bit of risk and nudged up to a 3.5 percent annual rate of return, you’d more than clear that $3,000 a month. In fact, if you had just dumped it all into a fund investing only in the S&P 500 over roughly that time span, you’d have more than double that rate of return.
One of the plaintiffs to the case claims after 40 years employment his ORP periodic payment (duration not mentioned) would be only $1,750 a month – and he makes nearly three times what I do. Which means he plans to live to 150 and/or, with all due respect and not wanting to sound unkind, made some poor investing choices.
Which taxpayers shouldn’t have to subsidize. My best guess is under DBP he would have made $8,750 a month for life, so you can see why he’s bitter, but you pay your money and you take your chances. You live with your choices and don’t socialize their costs onto others. Any legislation should avoid this situation, and hopefully the courts won’t produce this end.
No comments:
Post a Comment