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Jan 25, 2012
Governor Jindal Announces Pension Reform Plan

BATON ROUGE – Governor Bobby Jindal addressed the Rotary Club of Baton Rouge today where he outlined his plan to reform the state pension system to keep the state’s promise to workers, protect critical services and save taxpayer dollars.

Below Are The Governor’s Full Remarks As Prepared For Delivery:

“Thank you to the members of the Baton Rouge Rotary for inviting me here today.

“Today I’m going to outline my plan for pension reform.

“You may not think it’s the most interesting or exciting topic, but the future of our pension systems is critical to the future of our state.

“Consider the following.

“One – Our state retirement costs haven’t just doubled or tripled – they’ve quadrupled over the last two decades.

“Two – The gap between what we are promising in benefits and what we actually have on hand to pay those benefits – what’s called the UAL – has tripled over the past two decades to $18.5 billion today.

“Three – The UAL for the four state retirement systems is almost triple the payroll of the employees covered by those systems. We can’t just grow our way out of it.

“Four – Today, Louisiana taxpayers are spending nearly $2 billion just this year on state retirement.

“We’ve certainly some made progress over the past four years in addressing these issues, including:

  • Appropriating $60 million to help pay down the UAL

  • Requiring a two-thirds vote of the Legislature before enacting changes with an actuarial cost

  • Moving new hires into new simplified plans across the four systems with tighter benefit provisions

  • Helping local governments get rising pension costs under control by better sharing costs with employees and restricting inflation of benefits

  • Dedicating up to 10 percent of nonrecurring revenues to paying down the UAL

“The truth is though that state pension costs have grown, they continue to grow, and they are crowding out critical investments in priority areas.

“If costs continue on the current path, the state could see an additional $3 billion or more added to the UAL by the end of the decade.

“The path we are on is irresponsible. The reality is that we have three options to deal with our escalating public pension costs.

“Our first option – We could raise taxes on families and businesses.
 
“Most of you probably know by now that I’m opposed to raising taxes and it would be the wrong thing to do as we grow our economy.

“Our second option – We could ignore the problem and let another Governor or Legislature try to fix the problem before it gets too late.

“We have a Constitutional mandate to eliminate the initial UAL by 2029, but we must act well before then.

“The path we are on is unsustainable and irresponsible, and if we don’t act now to reform state pension systems, then the state will be forced to choose among several unacceptable options: break our promise to workers, be forced to cut critical services like higher education and healthcare, and/or saddle future generations with debt and higher taxes.

“That’s not going to happen on my watch and that’s not what I or the members of the Legislature were elected to do.

“We weren’t elected to kick the can down the road. We were elected to lead.

“That brings us to the third option – We can take the responsible approach and redesign our state retirement system so that we keep our promise to current workers, protect critical services, and make state government more sustainable.

“Now let me be clear – we have many dedicated public servants in our state agencies, our universities, and our hospitals that play an instrumental role in providing essential services to Louisianians.

“Thanks to their hard work every day, we are putting Louisiana on a path towards more prosperity.

“They deserve to be compensated fairly for their labor.

“However, the current retirement system is inefficient, expensive and outdated.

“If we continue to operate under the current system then we will be putting the retirement benefits we promised to workers at peril.

“The way forward is not to slash and burn public pensions. We need solutions that give employees a safety net as they get older.

“My plan to reform our pension systems focuses on three key areas, including:

  • Redesigning pension plans for new hires

  • Keeping our promise to current employees

  • Improving the operations, management and governance of our state pension systems

“These reforms will be focused on stabilizing retirement costs and keeping our promise to regular state employees and university employees.

“These reforms won’t affect retirement in K-12 schools since we are going to first focus on making sure that no child is trapped in a failing school.

“These reforms also won’t affect employees in law enforcement and other hazardous duty positions. We must protect the men and women who risk their lives every day and give them a strong assurance that their loved ones will be provided for.

REDESIGNING PENSION PLANS FOR NEW HIRES

“We need to fundamentally rethink how we structure state retirement plans.

“Let me put it another way.

“Some of you may have seen the news that Kodak – an American manufacturing giant – filed for bankruptcy recently.

“Kodak was once the leader in the camera industry, but as Glenn McNatt of the Baltimore Sun wrote recently, ‘by the end of last year it was rapidly running out of cash, its market share had plunged, and its stock was selling for just 54 cents a share...the company found itself reduced to selling off its patents simply in order to stay afloat.’

“As McNatt writes, Kodak originally became successful because it operated under a business model called the ‘razor blade’ by selling inexpensive cameras, then generating profits from the accessories that came with them, including film, chemicals and paper.

“So why did such a major company fall from grace? In short, the digital camera was introduced and film, chemicals and paper became old-fashioned.

“However, Kodak didn’t keep up and kept operating under the same business model.

“The irony is that Kodak’s employees were the first people to invent the digital camera, but as McNatt puts it, ‘the company’s leaders simply couldn't imagine a world in which pictures weren't shot on film’ and Kodak’s executives found themselves ‘behind the curve’ as they ‘failed to anticipate how rapidly and completely the new devices would transform the photography market.’

“McNatt said Kodak lacked the vision and imagination to keep up. They operated under an old-fashioned model that didn’t recognize reality.

“That’s the type of situation we find ourselves in today with the current retirement system.

“We can either keep up with the new era or fall behind, and bankrupt our current system and break our promise to workers.

“Under our current retirement plan design, we are making promises we cannot keep.

“We are promising a defined benefit that does not change even if the cost of providing that benefit increases at an unsustainable rate.
                                    
“Since the benefit does not change, taxpayers are automatically on the hook for paying more.

“We continue to offer the same benefit even if we have to cut into spending on other critical services.

“But just like Kodak’s use of film, traditional defined benefit plans are no longer the norm.

“The reality is that many workers today are not staying in a job throughout their entire career in the workforce.

“Workers today are looking for the freedom and the flexibility to seize the best opportunities which come their way.

“Traditional defined benefit plans don’t favor either the mid-career worker considering a switch to the public sector or the young graduate looking to get a few years of service in state government

“A traditional defined benefits plan without portability gets in the way of flexibility and freedom.

“As we see in the private sector, only 20 percent of workers nationally have access to a defined benefit plan.  401k’s and other defined contribution plans are much more common.

“In short, we are using an outdated model that is more expensive and less efficient that what many other states are doing.

“Across the nation, states are moving to plans which do a better job of sharing risk between employees and taxpayers and balancing spending on state priorities.

“Alaska has a defined contribution plan.

“Rhode Island, Indiana, and Utah have combined a lower defined benefit with a defined contribution plan.

“Some states like Nebraska and Kansas have implemented or are considering a hybrid plan called a cash-balance plan.

“A cash-balance plan combines the best features of defined benefit and defined contribution plans and that’s what I’m proposing we implement here in Louisiana for new employees for five reasons.

“First – we can have confidence that we will keep our promises to employees.

“It’s very simple – it is a payroll contribution and the investment returns on that contribution. We are not promising a benefit greater than what we can get in the market.

“This plan will ensure that we don’t create new UALs and keep digging the hole deeper and deeper.

“Let’s be honest: politicians created UALs by promising benefits – often to get votes – without worrying about how future taxpayers would pay the bills.

“The cash-balance plan will be available for current non-hazardous and hazardous employees, and teachers if they want to join.

“Second – employee savings for retirement are protected.

“Investment gains are passed on to the employee, but investment losses are not. Account balances will not be impacted by a market downturn.

“Third – employees can receive a lifetime benefit at retirement by choosing an annuity. They also have the option of taking their account balance.

“Fourth – a cash-balance plan offers greater portability of benefits and is better adapted to the needs of a mobile workforce.

“Even if you leave state employment before retirement age, you can roll over your savings into an IRA or other account.

“Under the current plan, you would lose any investment gains and the state contributions.

“Fifth – employees benefit from professional investment expertise since payroll contributions are kept and invested by the retirement systems on behalf of employees.

“In short, a cash-balance plan addresses our key needs of reducing risk and cost to taxpayers while ensuring a secure retirement for state employees.

“This is a responsible plan which will, according to actuarial modeling, provide a retirement benefit that is at least as generous as Social Security’s when market conditions are bad, and it will provide a benefit that is far better when market conditions are good.

“This plan will give state employees an investment account which can never lose value and can only grow in value.

“Redesigning our state pension systems for new hires is a critical first step to setting our retirement systems on a path to fiscal sustainability and sensibility.

KEEPING OUR PROMISE TO CURRENT EMPLOYEES

“The second area of our plan ensures that we keep our promise to current employees.

“The truth is that the state retirement systems have 60 percent or less of what they need on hand to pay out promised benefits.

“That’s an unsustainable model and if we continue down the current path, then we will break our promise to current employees.

“I am proposing three changes which will help us keep our promise to employees and which will protect current retiree benefits.

“These changes will have an immediate impact on the UAL, will eliminate incentives for costly behavior, and make the system more sustainable.

“First – we will calculate benefits using employee salary averaged over five years rather than three years in order to reduce the incentive for artificial inflation of salaries towards the end of a career.

“Six states have made similar changes the past two years.

“It’s hard to defend providing a lifetime benefit based on the three highest years of pay when Social Security is based on a career average.

“This change will not have a dramatic impact on benefits from the perspective of an individual employee, but its impact across employees is large enough to reduce the UAL by over $250 million. 

“Second – we will align the retirement age to 67 in order to mirror Social Security’s.

“Anyone who is 55 or older and approaching retirement will be exempted.

“Anyone who wants to retire early under the existing provisions can do so, with an actuarial reduction of benefits.

“Also, anyone who is currently eligible to retire can do so now without any reduction of benefits.

“Eight states have raised the normal retirement age or restricted early retirement over the past two years.

“Raising the retirement age does not decrease benefits an employee can receive.

“Third – we will only grant cost-of-living adjustments when we have enough assets on hand to pay all the retirement benefits already promised.

“We should only grant COLAs when we can really pay afford them.

“Today, we take part of our investment gains and put them into a slush fund. Those earnings aren’t used to pay the retirement benefits promised and they aren’t used to reduce the UAL.

“Also, this fund gets earnings when times are good, but does not contribute when times are bad.

“We should use those investment gains to pay down the UAL. It only makes sense to do that when our systems have 60 percent or less of what they need to pay the benefits promised.

“In addition to realigning benefits, we must also rebalance the retirement cost burden between taxpayers and employees.

“Taxpayers have been bearing more and more of the cost to support the state retirement systems over time.

“That’s because employee contribution rates as a percentage of payroll are fixed in statute and don’t change without additional legislation.

“However, employer contribution rates rise automatically to cover any cost increases.  

“As a result, the employee share of the total cost has fallen dramatically over time.

“In 1987, both state employees and university employees carried over 40 percent of the cost of supporting their retirement systems. Today, they carry a quarter or less. 

“That means taxpayers are picking up three-quarters of the cost of supporting the systems.

“Both state employees and university employees contribute 8 percent of payroll today.

“This is less than what most other public sector employees contribute to their retirement.

“In a national survey of state retirement systems, employee contributions in 67 percent of the plans contributed more than 8 percent of payroll, including Social Security contributions.

“We need to rebalance our contribution rates so that the bill doesn’t keep running up on taxpayers.

“That’s why it makes sense to increase the employee contribution rate by 3 percentage points to support the state retirement systems.

“A 3 percent increase is far below the 7 percent increase in payroll cost we’ve seen over the past few years just from investment losses.

“With this change, state employees will still be contributing one-third or less of the cost to support the retirement system.

IMPROVING SYSTEM OPERATIONS, MANAGEMENT, AND GOVERNANCE

“The final part of our plan focuses on ensuring that we are administering benefits and managing investments in the most efficient manner, taking advantage of economies of scale, and being responsible with taxpayer dollars.

“First – we should add the Commissioner of Administration to the state pension boards.

“By adding someone from the budgeting arm of the state, we can ensure that our pension boards understand the fiscal realities we are facing and that taxpayer dollars must be allocated responsibly in order to protect critical services, including higher education and healthcare. 

“Second – we must apply the same level of scrutiny to the operations of our retirement systems as we have to other agencies and look for opportunities to streamline and create efficiencies.

“Today, state retirement benefits are administered by four different systems, risking duplication of administrative and overhead costs.

“Each system has its own executive management and administrative and investment staff.

“Each system pays for its own actuaries, auditors, legal counsel, medical examiners, IT consultants, and investment advisors.

“That means data which are critical to budget and policy planning are scattered across the four systems and have no central home.

“That also means we lose the efficiencies which come from consolidating operations and managing larger pools of money.

“The bottom line is that this is an inefficient way to do business and not a responsible use of our taxpayer dollars.

“I am proposing to merge LSERS into TRSL since both systems cater to school employees and interact with the same sets of employers.

“LSERS has particularly high administrative costs per member of $172, well above the national benchmark of $101.

“Both systems have a ratio of employees to members which are well above industry standards.

“For instance, LSERS has a plan participant to staff person ratio of 681 to 1 and TRSL has a ratio of 1,036 to 1.

“The average for university and government plans is 3,945 to 1.

“To be clear, the merger will not change the benefits structure for plan participants and employers won’t pick up a UAL cost they didn’t have before from another system.

“This is a smart, common-sense move which will improve efficiencies across the two systems and ultimately save over $3 million.

“In conclusion, our plan will redesign state pensions, keep our promise to current employees, and improve the operations, governance, and management of our state retirement systems.

“These proposals will lay the groundwork for lasting, sustainable change and will save taxpayers over $450 million in the first year and over $1.5 billion over the next five years.

“The immediate UAL reduction will be at least $500 million and the UAL won’t continue to grow at the same rate.

“These pension reforms will free up money at agencies so that colleges can invest in classrooms and we can invest in healthcare services. Agencies have been stuck absorbing retirement cost increases in recent years and now with these reforms, they can invest in other critical services.
 
“Without question, this is a bold package of reforms, but the times we are facing call for dramatic change.

“We need to take action now.

“Everything that we are proposing is about improving Louisiana for generations to come.

“The bottom line is that we are on an unsustainable path and if we don’t take action now and wait for another Governor or Legislature to handle this, our retirement systems will bankrupt our state, leave our workers without the retirement benefits they earned, and leave our children and grandchildren with higher taxes and more debt.

“That’s not a future I want to see for our state and I know that everyone here agrees. 

“We must make take the responsible approach and get the growing cost of our pension system under control. And we must do it now.

“As Louisianians, we don’t shy away from a challenge; we rise to the occasion and win. 

“I hope you will all join me in this fight and support our efforts to reform the retirement systems and give our children and grandchildren the opportunity to live in a more prosperous Louisiana.

“Thank you.”

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