Retirement Plan Problems: A Review and an Update With Comments on Emerging Legislation

1. Retirement Plan Problems: A Review and an Update With Comments on Emerging Legislation January 2014

2. 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.

3. 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.

4. 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%

5. 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.

6. 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.

7. 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.