Retirement Plan
Problems: A Review
and an Update
With Comments on Emerging Legislation
January 2014
Colloquial, Real-World Definitions
Member Contribution: The amount deducted for retirement from
your paycheck (8% minus a 0.05% service charge); 7.95% reaches your
account(s).
Normal Cost: That portion of the employer contribution that reaches
your account(s).
Total Employer Contribution: The amount paid to the retirement plan
manager (“TRSL”) by the employer, LSU. This sum is not visible
either on your pay stub or on your retirement fund statements.
Unfunded Accrued Liability Contribution: That portion of the
employer contribution that is diverted from employees in order to
cover the non- and under-funded obligations of the state retirement
plans. Employees do not see this sum on pay stubs or retirement fund
statements.
Bare-Bones Explanation of the Problem
Very large sums of money—sums that comprise a substantial
percentage of higher education budgets—are removed from the total
employer contribution in order to pay down the “UAL” (unfunded accrued
liability). Despite the UAL being a public obligation, employees in the
quasi-private “ORP” (Optional Retirement Plan) pay, via the reduced
employer contribution, an enormous fee toward the elimination of a debt
that they did not incur. The vast majority of the UAL results from the fund
of K-12 pension obligations. ORP members are not allowed to vote in TRSL
elections and have no representation in or at the state government.
A Worsening Problem: Some
Exemplary Numbers
1995: Normal cost, 7.1%; UAL, 9.4%; total employer, 16.5%; employee receives
15%
2011: Normal cost, 5.9%; UAL, 17.8%; total employer, 23.7%; employee
receives 13.9%
Current: Normal cost, 5.2%; UAL, 21.3%; total employer, 26.5%; employee
receives 13.2%
Proposed 2014-2015: Normal cost, 3.6%; UAL, 22.7%; total employer, 26.5%;
employee receives 11.6%
Doing Better is Doing Worse
The normal cost for the ORP—the portion of the employer
contribution that employees receive—is tied, by law, to the normal cost for
the defined-benefit plan. That normal cost is set by state actuaries who
answer to the Governor’s office. When the defined benefit plan experiences
good investment results, the amount of current cash required to cover its
payments to retirees is smaller. As a result, the normal cost declines. Not
only is more money from the employer contribution diverted to the UAL
payment, but the reduction in the normal cost also reduces payments to
ORP participants. Thus, ORP participants are punished for good
performance by TRSL investments.
Legislative Responses: Pro & Con
Proposed HB6 by Representative Pearson establishes a minimum “floor” for the normal cost.
That floor is equal to the usual Social Security payment (6.25%). The “pro” for this bill: it halts
the reduction in payments to ORP participants. The “con” for this bill: it allows no flexibility,
i.e., it inhibits systems from exceeding the 6.25% floor payment.
Proposed SB5 by Senator Guillory undoes the irrevocability rule for election into retirement
plans. It allows employees to transfer from the ORP into the defined benefit plan. Under SB5,
employees would surrender their retirement accounts to the TRSL, which would determine
their values with regard to years of service credit. The “pro” of this bill is that allows most
employees a route back into the defined benefit plan; the “con” is that it allows TRSL to set the
price of service years (thus, an employee who has been saving for twenty years might only
purchase ten years of service credit).
The Board of Regents has drafted another bill that resembles HB6 but that allows university
systems to contribute additional sums beyond the floor. This draft bill pegs the ORP normal
cost to the TRSL normal cost plus an additional constant value, then allows management
boards to enhance that sum. Pro: No limit to contributions by institutions. Con: Some
institutions may add no supplement, leaving participants worse off then previously.
More to Come
This presentation is only an update and an introduction. Louisiana’s higher
education retirement plan is unequaled in the nation with respect to its
poverty and its resistance to best practices and usual standards. LSU and
LSU System faculty governance is working with other faculty leaders
throughout the state to improve the retirement plans. We will be calling on
you for help as the legislative session approaches.