LASERS Responds to Baton Rouge Business Report

On February 5, 2013, the Baton Rouge Business Report published an article by Penny Font entitled, “No Escape,” which characterized public pensions as generous and unsustainable, ultimately costing the citizens of Louisiana more tax dollars. In attempting to make its point, the article lumps together anecdotal stories from 13 different public retirement systems, ignoring fundamental distinctions. 

Further, the article relies on reports by the Bureau of Governmental Research, the Pew Center, and Northwestern University, which have previously been analyzed and criticized*  for providing misleading, incomplete, or erroneous information.  Of particular note is a recently released report from the Government Accountability Office (GAO) that categorically rejected conclusions set forth by Northwestern University.  The GAO found:  Referring to the May 15, 2010 report by Joshua Rauh that projected some notably early fund exhaustion dates, "the projected exhaustion dates are ... not realistic estimates of when the funds might actually run out of money." The new GAO report, which is "the most comprehensive government study of public pension plans to date," validates "that the vast majority of plans are adequately funded to meet their current obligations and have adopted systemic and operational reform to ensure their long-term sustainability."

On behalf of LASERS, the retirement system for State employees and elected judges, I would like to call your attention to the following:

• Private sector employees, by law, participate in a defined benefit plan: Social Security.  And as noted in your report, most also have what is known as a defined contribution or 401(k) type plan.
• Public sector employees in Louisiana, by law, do not participate in the Social Security defined benefit plan; nor do they have a 401(k) type plan. Instead, the State of Louisiana decided decades ago that state employees would participate in LASERS.
• Private sector employees contribute 6.2 percent of payroll to Social Security.  LASERS rank-and-file members contribute 7.5 to 8.0 percent of their annual salary toward their retirement benefits.  Judges who are LASERS members contribute 11.5 to 13 percent.
• Private sector employers pay 6.2 percent of payroll to Social Security.  Louisiana will be contributing 6.1 percent of payroll for the accruing benefit of its employees. 
• LASERS members are also taxpayers.
• The average LASERS rank-and-file employee pension is $21,732 per year, which can hardly be described as generous.
• From 1999-2011, Social Security recipients have received 11 cost-of-living adjustments.  Over that same time period, LASERS retirees have received seven such adjustments. 
• LASERS retirees have not received a cost-of-living adjustment (COLA) since 2008-2009, with 22 percent of our retirees receiving payments below the poverty level.
• Pension experts do not “agree that trading a defined benefit plan for a defined contribution plan helps governments remain solvent.”  In fact, experts have recognized that such a swap does nothing to satisfy existing debt of retirement systems. Read the National Institute on Retirement Security report, A Better Bang for the Buck, for this information.

Ms. Font did acknowledge that LASERS realized a 14.3 percent investment return for the calendar year 2012, with a three-year average return of 10 percent.  Losses in tough times like 2008 were across the board for all investors, not a “painfully obvious sign” of lack of investment expertise.  In fact, LASERS has been ranked in the top ten of pension systems nationally for the past decade.  By managing over $3 billion of our fund internally, LASERS will save over $9 million this year; enough to fund the salaries for our entire agency.

The debt owed to LASERS by the State has not “more than tripled . . . largely due to poor investment returns and lawmakers who reduced the debt payment schedule in 1992 and increased benefits in 1993 and 2001.”  Rather, the debt has grown primarily because of a statutorily enacted, back-loaded, payment schedule and the interest that accrues each year on that debt.  But, the legislature has continued to grapple with that debt, making the annual required contributions to it, and modifying the payment schedule in 2010 to realize significant savings.  In the next fiscal year, the payments will finally start paying into the principal.

On the current payment schedule, in 10 years the debt owed to LASERS will decrease by nearly $1.5 billion.  In 20 years, it is expected to decrease by $4.4 billion.

It is unfortunate that the bold reforms enacted by the legislature since 2005 have been ignored or forgotten by the Business Report.  In fact, these real reforms are expected to reduce pension costs by nearly $700 million. 

The failure by the legislature to adopt recent administration proposals to harshly reduce the benefits of current members of LASERS should not be attributed to fear of losing 500,000 votes, as stated in the article; but, rather, to the recognition that those members received a benefit package as part of their compensation agreement and have contractual and constitutional rights to those benefits. 

These significant legislative changes modify the benefit structure for future employees and therefore, contain costs.  And, contrary to the representation in the article, many of these reforms were recommended in a 2005 report of the Public Affairs Research Council, including:

• Raising the normal retirement age to 60,
• Instituting a sub-plan for hazardous duty employees,
• Instituting a 60-month final average compensation period,
• Building in-house investment expertise,
• Emphasizing passively managed investments, and
• Lowering the 8.25 percent assumed investment return.

LASERS remains committed to achieving strong investment returns and responsibly managing the funds of the more than 100,000 active and retiree members of LASERS. Decisions made that affect the lives and welfare of so many of our citizens should be based on facts.  As such, we appreciate the opportunity to set the record straight.

Cindy Rougeou,

LASERS Executive Director

* For more information on LASERS responses to reports by the Pew Center and Northwestern University, please visit the following links:

§  LASERS Response to Pew Center on the States Report

§  LASERS Responds to November 8 Times Picayune Report

§  LASERS Responds to Rauh Report

§  LASERS Responds to Pension Sustainability Report

§  NASRA Issues Response to Rauh Report

Louisiana state employees' pension system disputes dour report

By Jeff Adelson, The Times-Picayune

Louisiana's largest state employee pension system is pushing back against a report issued by a national nonprofit this week that gave dismal marks to the state's pension systems. The Louisiana State Employees' Retirement System said the Louisiana section of the report by the Pew Center on the States, which analyzed public pension systems across the country, was inaccurate and did not credit the state's efforts to put its retirement systems on more solid footing in recent years. A news release from the retirement system Wednesday said that despite investment losses in 2008 that reduced the system's assets, the fund is recovering and receiving all payments needed to keep it sound. That includes a 24 percent return on investments in the past year, which was not covered by the report.

In "examining historical returns, the system has kept pace with expectations," according to the release.

Gov. Bobby Jindal put a significant emphasis during the recently ended legislative session on dealing with the more than $18 billion gap between the amount of money in the four statewide pension systems and the amount needed to fully pay out all their promised benefits. But the Legislature shot down most of the governor's proposals, which would have required workers to retire later, pay more of their own money into the pension system and potentially receive smaller pension checks. Opponents of those plans argued it was unfair to change the rules on workers in midstream and that such efforts were potentially unconstitutional in light of promises enshrined in the state Constitution protecting retirement benefits for state workers.

Only one of Jindal's major pension proposals was signed into law. That plan will put newly hired workers into a 401(k)-style system where their retirement benefits are largely dependent on the performance of investments rather than a traditional pension that guarantees retirees receive a specific benefit based on years of service and salary.

The plan was mentioned in Pew's report but the LASERS response noted that the report did not give the state credit for other changes implemented in recent years, including changes to the contribution rates and retirement dates for new hires. The Pew report recommended changing those aspects of retirement plans in a broad outline of how states should move forward.

The Pew report also incorrectly asserts that the state had not made full contributions to the retirement system three times between 2005 and 2010. Officials with LASERS said that was not the case.

"LASERS is receiving the necessary annual payments from the State to satisfy its liabilities," according to the LASERS news release.

Jeff Adelson can be reached at jadelson@timespicayune.com.

LASERS Responds to Inaccuracies in Pew Center on the States Report

The recently released report from the Pew Center on the States, “The Widening Gap Update,” includes the Louisiana State Employees’ Retirement System (LASERS) as one of the four Louisiana retirement systems in the analysis presenting “serious concerns.” The report concludes that states continue to lose ground in covering long-term costs of pensions and retiree health care. In response to this report, LASERS is issuing the following information to correct the inaccuracies. Specifically, LASERS disagrees with the Pew report’s conclusion that the State has not paid the required contributions to the system.

The Pew report is based on 2010 data. Louisiana’s position has improved since the 2010 numbers. As of June 30, 2011, the funded percentage of LASERS is 57.6 percent, as opposed to 56 percent in 2010. The LASERS market return for that same time period was over 24 percent.

The unfunded accrued liability (UAL) of LASERS, about $6.4 billion of the $18 billion total for Louisiana, is primarily the result of the system being created without adequate funding, decades of the State failing to fully pay its required employer contributions, and interest accruing on a back-loaded payment schedule. In compliance with a 1987 constitutional amendment, the State has consistently made its required contributions. Of course the 2008 Great Recession had a negative impact on system returns, on the UAL, as well as on our funded status. However, in examining historic returns, the system has kept pace with expectations.

The PEW report also fails to recognize the significant reforms that Louisiana has made in recent years. 

In particular, the report suggests:

•   “Keeping up with the annual required contribution is perhaps the most effective way that states can responsibly manage their long-term liabilities for public sector retirement benefits.”  

Louisiana has made its annual required contributions, and the report’s assertion that it has not, is inaccurate. 

•  “asking employees to contribute a larger amount toward their pension benefits”

The employee contribution rate for rank-and-file new hires starting in 2006 was increased. Similar increases were also enacted for new hires in hazardous duty plans starting in 2011.

•  “increasing the age and years of service required before retiring”

This was accomplished for rank-and-file new hires starting in 2006.

• “limiting the annual cost-of-living (COLA) increase”

LASERS pays a COLA only after it has met certain investment return criteria and the COLA has been legislatively approved.  There is no automatic annual COLA.

• “crack down on abuses, such as the practice of “spiking” final pay to get a larger pension check by including overtime pay and sick leave"

LASERS generally does not include overtime pay in calculation of pensions and has limited “spiking” for years, with the limit decreased to 15 percent for new hires starting in 2006.

The report also notes that, “The reforms that states have enacted in the last three years mostly affect future state workers, as it is legally difficult to reduce benefits for current employees and retirees.” The Louisiana Constitution recognizes that state employees have a contractual right in their pension benefits, and that benefits may not be diminished or impaired. Therefore, it is critical to discuss pension changes for current employees only in the context of keeping promises made to those employees.

If Louisiana wishes to decrease the liability it owes to the system, the State could make additional payments, other than the required contributions, to more quickly reduce the debt. However, the State is currently following a prescribed payment plan to satisfy its debt by 2029. LASERS is receiving the necessary annual payments from the State to satisfy its liabilities.

The issue of retiree health care costs analyzed in the Pew report is not the responsibility of LASERS, therefore it is not addressed in this response.