Tuesday, March 29, 2011

Proposal to increase LASERS’ Rank-and-File contribution by 3%

On Friday, March 11th, the Joint Legislative Committee on the Budget heard a presentation on the Governor’s Executive Budget for the upcoming fiscal year.  A recommendation was included in that presentation to increase the contribution rate for non-hazardous duty employees in LASERS by 3 percent.

Since several legislators have contacted LASERS requesting additional information on the employee and employer contribution rates, as well as other comments contained in the budget presentation, I thought it would be helpful to provide each member of the legislature with the following data.

In the current fiscal year the cost of the accruing benefit (the normal cost) for our members is 14.99 percent of payroll.  Of this amount, the rank and file employee pays either 7.5 percent or 8 percent depending on when they were hired.  The state pays 6.56 percent. Thus, the employee is actually paying about 54 percent of the cost of the accruing benefit.
Almost all of the remainder of the employer contribution rate (15.44 percent) constitutes the state’s payment on the debt.  It is important to recognize that the debt, or UAL payment, is on a statutorily established, increasing, back-loaded payment schedule.

The majority of the debt payment is due to insufficient employer contributions paid in prior decades coupled with the back loaded payment schedule to pay off this debt.  The employee does not, and has never been required to pay a portion of the state’s debt payment. 
A Constitutional Amendment was passed in 1987, requiring the state to pay the debt.  Since the passage of the amendment, the state has made its requisite normal cost payment and debt payment on the schedule that was created by the legislature.  (This was recognized in a recent PEW Report). It should also be noted that in 2009, Act 497 was passed creating a new payment schedule with the expectation that the state would realize a savings of $500 million.

The budget presentation referred to the 1987 contribution rates.  Specifically stating that, “…employees contribute 8 percent of their pay to cover the future cost of their benefits, while the state contributes an amount equal to an additional 22 percent of employees’ pay to cover pension benefits.  As such, employees contribute less than 27 percent of the cost of their retirement, while the state’s share of the cost exceeds 73 percent.” 

The presentation went on to say that, “In 1987, employees in LASERS paid over 40 percent towards their own retirement whereas now they pay only 27 percent.”  This conclusion apparently formed the basis of the justification that employees should now pay an additional 3 percent of salary toward their retirement.
Relying on the 1987 valuation is problematic when seeking an apt comparison to current contribution percentages.

The 1987 valuation was calculated using a method (entry age normal) that was changed in 1988.  That valuation was also done prior to the enactment of the Constitutional requirement regarding debt payment.  In contrast, the 1988 valuation was done using the same method that we use today (projected unit credit).  It was also done with application of the Constitutional requirement regarding debt payment, as is done today.
The cost of the accruing benefit in 1988 was 12.8 percent of payroll, which we refer to as the normal cost.  Of that amount, the employee paid 7 percent and the state paid 5.8 percent.  As such, in 1988 the employee contributed about 54.69 percent of their salary toward retirement.  As noted above, current rank and file employees are still paying about 54 percent of the cost of their accruing benefit.

The budget presentation stated that “Out of 45 states surveyed, Louisiana ranks third highest in the nation for employer contribution rates as a percentage of payroll…”  As the JLCB members know, our state employees do not participate in Social Security.  In fact, only six other states are in a similar situation.  (Only five other states have a constitutional requirement regarding debt payment).  Therefore, it would not be possible to find 45 states that aptly compare to Louisiana in this regard.  Maine and Massachusetts are the only two that are both non participants in Social Security and required by Constitution to make their debt payment.  The employee contribution rate in Maine is lower than that of our new hires.  The employee contribution rate in Massachusetts is higher than that of our new hires.

For the sake of discussion, the budget proposal also raised several compelling constitutional issues with respect to imposing the increased rate on current employees.  Article X, Section 29(E) (5), of the Louisiana Constitution provides in part that
“…accrued benefits shall not be diminished or impaired.”  Article X, Section 29(B), provides that “…membership in any retirement system of the state…shall be a contractual relationship between employee and employer.”  And of course, the U.S. Constitution in Article 1, Section 10, Clause 1 states, “No state shall…pass any…ex post facto law, or law impairing the obligation of contracts…

I hope that the information provided herein has answered the questions posed to LASERS.  We are happy to provide any additional information that you may deem helpful.

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