The Writing Is On the Wall

Wednesday, November 23, 2011

But do the governor and Legislature have the courage to fix our state pension system?

As I enter my last term as a member of the Louisiana House of Representatives, I still cling to the belief that one person can make a difference. Although there are many challenges facing our state, pension reform is easier to fix than most others. A little political will from both the governor and the Legislature is all it will take.

To summarize the challenge, we are about $16 billion short of the funds needed to pay our state employees the retirement benefits that are required by our state constitution. This is known in accounting terms as our unfunded accrued liability (UAL). Current law requires us to pay this off by the year 2029. It’s no small task, but with a few significant adjustments, it is surprising how easily we can move this one major problem off our plate.

These are a few changes that could be made to help alleviate our pension problem:

• When the state collects more than it budgets, we have a surplus. Typically, this surplus money is used by the governor to curry favor with legislators in the form of road projects and other infrastructure needs in their districts. Politically smart, but not the best use of surplus dollars considering our pension crisis. If that same amount of money were put toward retiring our pension shortfall, we would be well on the way to fiscal recovery. The concept is similar to prepaying your mortgage. For every $1 we put toward our UAL, we save about $4 dollars in interest costs between now and 2029. During my short eight years of public service, under two governors, we have spent more than $5 billion in surplus dollars. In that time, we have only directed $60 million toward paying off the UAL, which represents only 1.2 percent of the money that was available.

• Currently, we calculate a state employee’s retirement benefit based on the three highest salary years (five years in some situations). We should consider moving to a lifetime average of salary, just as Social Security does for private company workers.

• State employees are allowed to retire at various ages depending on their number of years of service. For some, this is as early as age 55. Again, we should learn from our Social Security system and move the retirement age to 67 before a state employee can collect full benefits. If retirement occurs prior to age 67, then the retirement benefit would be reduced in a similar fashion to how Social Security works.

• Cost of living adjustments should only be allowed once the retirement systems are fully funded, and any adjustment should not exceed historical inflation while keeping in mind that health insurance costs are not directly included in the consumer price index.

• All new employees should be given the option to invest in our existing state run defined benefit plan (DB) or in a newly created defined contribution plan (DC or 401k type plan). Switching to a DC plan won’t do anything to help with the current UAL, but it would eliminate the possibility of future UALs by placing investment risk with the employee rather than the employer (the state).

It must be noted with regard to this last option that our state employees are not covered by Social Security. Hence, if they retire from state employment and get a job in the private sector and then later retire from that private sector job, they are not allowed to collect both a state retirement check and a Social Security check. Their Social Security checks are reduced via a complex formula that effectively eliminates the possibility of a second retirement check. I know it seems unfair, but it is a federal law that Congress must change. Until that happens, the state needs to keep in mind that our state employees rely solely on us for their retirement.

The governor and the Legislature need to find the courage during these next four years to reform our state pension system. State employees would obviously prefer to keep things as they are. Fiscal reality, however, suggests that we must not stand idly by. In order to make good on the promises we have made to these same employees, we must push for changes to the existing retirement systems. It will require our elected officials to take politically unpopular stances and to be firm in their convictions. This is a tremendous opportunity to make good on our pledge to leave the state in a better position than we found it.

A Lafayette CPA and speaker pro tem of the outgoing House of Representatives, where he will begin his final term in January, Joel Robideaux is vying for the role of speaker of the House despite that Gov. Jindal has publicly said he will support Lake Charles State Rep. Chuck Kleckley for the top post. A longtime independent lawmaker who switched to the Republican Party earlier this year, Robideaux has vowed to force a roll-call vote when lawmakers are sworn in Jan. 9.

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