In The News › Amid rising costs, New Orleans employee pension fund under pressure to trim benefits

Amid rising costs, New Orleans employee pension fund under pressure to trim benefits

By Robert McClendon

NOLA.com | The Times-Picayune

February 2, 2015

Officials in charge of New Orleans’ largest public pension fund are considering changes that could relieve pressure on the city’s budget but at a cost for employees and future pensioners.

New Orleans Municipal Employees Retirement System board at a January meeting released a list of the potential alterations, which included raising the retirement age and increasing the amount of money employees are required to contribute. The board forwarded the possible changes to its actuary to evaluate how they would impact the health of the pension fund, benefits for employees and the city’s budget.

The board produced the list of options at the request of City Council President Stacy Head. With pension costs eating at the city’s budget, Head has been pushing the board to consider changes.

She also has floated several options of her own and sought expert analysis on how much certain cuts to current, vested employees would save the city. In a phone interview last week, however, Head said she has never suggested that benefits be reduced for employees vested in the city’s plan.

The city is having to pay more into its pension funds because the retirement systems owe employees and retirees more in benefits than the value of their investments. Such imbalances are, in the pension world, called unfunded liabilities.

Having an unfunded liability doesn’t mean a fund is broke, or even in immediate danger of going broke, provided the unfunded liability isn’t extreme.

But growing unfunded liabilities are a red flag. That is a sign a pension fund is on an unsustainable path that, left unresolved, can end in default.

Growing unfunded liabilities impact the bottom line for taxpayers in the present. In any pension fund, the employer acts as the primary funding source. When investment returns and employee contributions are not enough keep the fund on a sustainable path, the city is supposed to increase its contributions to keep the unfunded liability from spiraling out of control.

That means the city has less money available to spend on roads, more police officers or raises for current employees.

Rising payments due

Until recently, the city’s contributions to the retirement system were relatively small. In 2007 the fund boasted a funding ratio of 94 percent, meaning it had enough assets to cover nearly all of the benefits promised to participants in the plan. The city’s payment due to the pension fund that year was $3.7 million, less than 7 percent of payroll.

But the ratio fell sharply in the years following the financial crisis, as the stock market plummeted, slicing into the pension fund’s investment portfolio. Meanwhile, the size of the workforce also shrank relative to the number of retirees drawing benefits, further eroding the plan’s funding ratio.

By last year, the funding ratio had declined to 73.6 percent and the city’s bill had grown to more than $20 million, or about 22 percent of payroll.

The retirement system’s current funding level, and the city’s payment relative to payroll, is still about average compared to other locally controlled pensions in the United States, according to the Center for Retirement Research at Boston College. But the city can’t afford for the funding ratio to slip much further.

The New Orleans Municipal Employees Retirement System, with 4,300 employees and pensioners, is by far the largest of the city’s three locally controlled pension funds. It covers nearly all city employees apart from police and firefighters, plus staff from other public entities like the coroner and the district attorney’s offices. Were NOMERS’ funding level to fall to that of the Fire Fighters Pension and Relief Fund, which is funded at only 20 percent, the city’s required pension contribution would swamp the budget.

One way to ensure the funding ratio doesn’t continue to deteriorate is to cut benefits.

Enter councilwoman Head.

Last year, she asked the NOMERS board to come up with a list of changes it would consider in order to reduce the unfunded liability. The board complied, but nearly all the proposals it released at the January meeting would affect only future employees. That means the city wouldn’t see much relief for many years.

Raising the employee-contribution rate from the current 6 percent of salary to 7 or 8 percent is among the only proposals by the board that would affect current workers and immediately impact the unfunded liability.
The City Council holds ultimate authority to change the pension plan, and Head has been asking about more aggressive options.

In an interview, Head said unequivocally that she is not considering any changes to employees who are vested in the retirement system, which, under current rules, means those with five years of service. “I have never even once made any suggestion that vested benefits would even be a subject of discussion,” she said.

But a letter from NOMERS’ actuary shows that Head asked for an analysis of five kinds of cuts to benefits and how they would affect the city’s annual contributions and the plan’s funding ratio. For four of the five cuts, Head asked the actuary to determine the impacts when applied to current, vested employees.

There was no mention of restricting cuts to new employees.

Social Security integration

In December, the actuary finished his analysis on the last option proposed by Head, a reduction method called “Social Security integration.” Under that scenario, retirees’ pensions would be partially offset rather than supplemented by Social Security.

NOMERS participants, unlike those in some other government retirement systems, are required to pay into Social Security as well as the city’s pension system.

Asked why she would consider such an integration plan for current employees, who may be banking on Social Security money to supplement their city pension, Head said that the retirement system plan is out of step with other public sector pensions. Very few public employment plans allow retirees to collect their full pensions along with a Social Security benefit in the way NOMERS does, she said.

But participation in both public pensions and Social Security is common, according to two think tanks that study public pension systems. Researchers at the Pew Charitable Trusts and the Center for Retirement Research said that about 75 percent of public-sector workers are covered by pensions and Social Security.

“Generally speaking, the decisions on public employers participating in Social Security were made decades ago, and it is not common for state or local governments to change these decisions,” said Greg Mennis, director of Pew’s public-sector retirement systems project.

Plans that require participation in Social Security are usually less generous than those that exempt employees from the federal system. They usually structure their pensions to take into account the supplemental income employees receive from Social Security.

But the New Orleans plan, compared to other systems, can yield unusually lavish benefits for certain kinds of employees, according to a 2012 analysis by the Bureau of Governmental Research, a local think tank. Under certain circumstances, lifelong employees can earn more in retirement than they did on the job thanks to addition of their Social Security benefit, according to the report.

The actuary said Social Security integration could be appropriate, but it wouldn’t save the city much money and it would penalize low-wage workers.

The city, like any private employer, pays for half of a worker’s Social Security costs, so it’s not unreasonable for the city to deduct those contributions from an employee’s pension package, the actuary said, but doing so would represent a “radical change” in the plan’s structure. It might not be legal to apply it to current employees, he said.

The actuary also noted that Social Security’s benefits are proportionately more generous at the low end of the wage scale, so the workers who benefit most from the current system are those at the bottom rung of the employment ladder. If pension benefits were reduced as a function of Social Security payments, as Head’s scenario would do, low-paid workers would take the biggest hit.

The move also would provide relatively little budget relief, according to his analysis. The most aggressive of Head’s scenarios would apply Social Security integration to all employees with less than 15 years service. That would improve the fund balance by .3 percent and save the city $1.5 million in 2014, and more over time as the share of employees covered by the new plan increased.

Legal action likely

In a Dec. 10 article in The Lens, Head said that all options are on the table, but Social Security Integration is the front-runner.

She told NOLA.com | The Times-Picayune that she has no preferred policy change at this point. She said she will do her research and due diligence before making any recommendation.
Her decision could have legal ramifications.

Many states, including Louisiana, have laws or constitutional provisions that protect pension benefits promised to employees. In Louisiana, such promises are considered to have the force of a contract.

The limits of such protections, however, are the subject of debate around the country, as cities and states look to cut pension costs in order to balance their budgets.

Norman Foster, the city’s director of finance and a member of the NOMERS pension board, alluded to this during the January meeting, saying that governments might be able to make some changes via their “police powers,” their right to take action to protect the safety of residents.

This theory is being put to the test in Illinois, which is facing a statewide pension crisis.

Social Security integration would most likely result in litigation, said Robert Klausner, a lawyer and pension-law export who has written a legal guide for pension administrators and attorneys. He said the city would almost certainly lose if it tried to impose it on current employees.

Klausner previously sued the city on behalf of a NOMERS board member, though no decision was rendered before the board member left office. He also sued on behalf of the sheriffs’ pension fund, a matter that was ultimately settled.

Head, through a spokeswoman, said she’s been told by other lawyers that the city could cut benefits to current employees and perhaps even vested employees.

“Sure, you could try,” Klausner said. “But why would you want to put the city through that kind of expense.”

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