Wednesday, December 12, 2012

Bill uses increased retirement payments from state workers to fund cost-of-living adjustments

By Jeff Adelson, The Times Picayune

Two controversial state pension measures shot down by the Louisiana Legislature last session are poised to make a comeback, tied this time to a proposal to offer automatic cost-of-living adjustments for some state workers after they retire. The two measures, an increase in both the amount of money employees contribute to their own retirement and the number of months of salary used to calculate their pension benefits, are part of a package of proposals put forward by Senate Retirement Committee Chairman Elbert Guillory.

The package also includes an increase in the amount the state pays toward an employee's retirement and a separate proposal, still in its early stages, to tap state funds to help pay down the $18.5 billion the four pension systems need to meet their obligations to state workers.

In recent years, retirees and their representatives have begged lawmakers to come up with a system to provide cost-of-living adjustments for retirees whose pensions, in many cases, have been significantly devalued due to inflation. While solutions have been proposed, most of those have consisted of narrowly tailored bills that would only grant a bump to specific groups of workers.

None of the cost-of-living bills proposed this year succeeded in passing, in some cases because no one could identify any money to fund the increases.
"Every year we have retirees on their hands and knees begging for cost-of-living adjustments," said Guillory, D-Opelousas, as he presented the bill to the Senate Retirement Committee on Tuesday.

Though Guillory's bill, the first legislative proposal to be unveiled prior to April's legislative session, relies on measures that were defeated last year, there is some sign that using those mechanisms to fund increased benefits might gain some traction.

Both proposals were part of a retirement overhaul proposed by Gov. Bobby Jindal at the beginning of this year's Legislative session. The bills, along with several other retirement proposals pushed by the administration, were blocked by legislators, largely over concerns about changing the rules for those who were already working for the state and making plans based on the promise of specific benefits. Many also objected to the original versions of the bills, which would have freed up money for the state's general fund rather than redirecting the savings back into the retirement systems to pay down the unfunded accrued liability.

Guillory carried those bills for the administration in the Senate.

In addition to increasing employee contributions and extending the time used to calculate benefits, Jindal also proposed increasing the retirement age for some state workers to 67, merging two of the state retirement systems and putting most new workers in a 401(k)-style plan known as a "cash balance plan." Of those proposals, the Legislature only signed off on the cash balance plan, though that law has been challenged in court as unconstitutional.

Plan calls for employees to pay more to fund own cost-of-living increases

Currently, cost-of-living adjustments for retirees are granted when the retirement systems' portfolios outperform their goals. The excess money goes into "experience accounts" and, when enough has been set aside, a cost-of-living adjustment is granted.

However, because the systems use a system that looks at the past five years of returns when considering investment performance, a time period that includes the "Great Recession," those accounts have not received any funding since 2008 even though the investments have outperformed their goals during many of those years.

In contrast, Guillory's bill increases the amount employees contribute to the pension system by 3 percent of their salaries to pay for automatic increases to their own benefits every two years. Additional funding would come from extending the time used to calculate benefits from 36 months to 60 months, a move that generally will mean years of lower pay will be averaged in, lowering the final benefit received by retirees.

The bill only applies to workers in the Louisiana State Employees Retirement System and the Teachers Retirement System of Louisiana.

The state would kick in an additional 1 percent of each employees salary to help pay for increases for those who have already retired.

Under the proposal, workers would be guaranteed a cost-of-living adjustment to their pension payments in every odd-numbered year. Those increases would be somewhere between 1 percent and 2 percent, depending on inflation. The bill specifies that these increases will guarantee the retiree retain 80 percent of their purchasing power.

Employees would become eligible for the adjustment if they are both older than 65 and have been retired from state service for more than five years.

The bill includes a provision calling on officials to review the funding at least every five years and look into reducing the contributions made by employees if they are more than enough to fund the increases.

Bill met with interest, concern

While last year's proposed pension overhaul was met with sharp opposition, Guillory's bill seemed to at least pique the interest of some lawmakers and retiree advocates Tuesday. Still, that interest was tempered with concern.

RetiredState Employees Association Executive Director Frank Jobert, who fought against last year's proposals and has advocated for cost-of-living adjustments, said that he saw "room for movement on the proposal." Still, he said he worried about the impact the plan would have on current employees.

"Can employees afford to pay an additional 3 percent when they haven't seen a pay increase in years?" Jobert asked.

Another opponent of last year's overhaul, Rep. Sam Jones, D-Franklin, said that the plan was a good effort but also worried about the way the proposal would be funded.

The sustainability of the proposal also weighed on some lawmakers' minds.

"I don't want to make a promise, especially to these workers who have given so much, and find out it can't be sustained," Sen. Gerald Long, R-Winnfield, said. Long has proposed several bills in the past seeking cost-of-living adjustments for some retirees.

The proposal was still being drafted late Monday night and actuaries had not weighed in on how it would impact the way the systems are funded. Discussions during the Senate Retirement Committee meeting suggested the state's contribution to the plan could be in excess of $180 million, an amount that could be difficult to raise during what is expected to be a tight budget year.

The governor's office has not yet weighed in on Guillory's proposals. Asked about the measures Tuesday, Jindal spokeswoman Shannon Bates said in an email, "We'll review the legislation once it's filed."

It's not yet clear whether the administration will present its own set of retirement proposals in the next year.

"As for plans next session, we aren't ruling out more reforms that will make our pension system more sustainable and efficient for taxpayers," Bates said.

Additional funds for retirement systems to come from state revenues

In addition to the bill dealing with cost-of-living adjustments, Guillory said he plans to introduce legislation that would direct a portion of specific state revenues to the retirement systems.
That bill, which has not yet been drafted, will single out money the state receives from legal settlements, interest earned on unclaimed property, license fees and tax and fee revenue that exceeds the amount brought by the state last year. The bill would take 2 percent of the money brought in from each of those sources and direct it to the retirement systems.

Under the proposal, about three-quarters of that money would go toward paying down the unfunded accrued liability and one-quarter would be used to reduce the costs of the cost-of-living proposal to the state and its workers.

Guillory said the proposal to redirect some of the interest income has been received with "enthusiasm" by those involved in the process. There has also been interest in the proposal to take some money from state settlements.

The issue of settlement income could create problems on its own. Guillory has said he hopes to tap into money that will flow into state coffers as a result of the Deepwater Horizon oil spill, an amount projected to total billions of dollars. However, the federal RESTORE Act requires that money be used to recover from the damage caused by the spill and state law directs it to the state's Coastal Protection and Restoration Authority.

"I certainly intend to lead an effort to get around it," Guillory said when asked about those restrictions.

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