In The News › BGR urges changes to New Orleans area public pension plans to control costs

BGR urges changes to New Orleans area public pension plans to control costs

By Richard Thompson

The Advocate

October 20, 2016

Describing local governmental pension plans as “in desperate need of reform,” a watchdog group released a report Thursday outlining potential changes that could bring retirement benefits closer in line with national standards, paring back overly generous benefits — and taxpayers’ costs — over the long term.

The report, titled “Reducing the Cost of Tomorrow,” is the fourth released by the Bureau of Governmental Research since 2012 to examine rising pension costs and offer ideas for shifting more of the risk from public employers. It’s an issue facing state and local officials across the country.

Compared with seven years ago, taxpayers are footing a larger bill to cover the costs of all but one of the 18 public pension plans in Jefferson, Orleans and St. Tammany parishes, BGR’s report said.

Perhaps the most significant change recommended in the 33-page report would be capping the percentage of an employee’s salary that he or she could receive in retirement. All 18 of the local plans allow members to receive annual retirement benefits equal to 100 percent of their average compensation during their final few years on the job, according to the report.

In New Orleans, which is hampered by the outsized tab to cover its struggling firefighters’ retirement plan, the city will spend nearly $106 million on pension costs in 2016, the report said, which eats up 16 cents of every $1 in the city’s general fund.

But as New Orleans officials have learned in recent years, making adjustments to formulas that govern how benefits are paid can be tricky. Most plans’ structures are controlled by state laws, and changing retirement benefits — even for future hires — is almost always unpopular politically, even if it saves taxpayers money in the long run.

While BGR’s recommendations mostly involve changes that would affect future hires, its report doesn’t wade into potential legal issues that could arise, nor does it refer to an actuarial analysis projecting potential savings.

Although many pension systems across the nation struggled in the aftermath of the 2008 financial crisis, more can now be done to rein in how benefits are calculated, the report said.

A myriad of factors determine how much retirees receive through a “defined benefit” plan, including the rates at which they’ve contributed money and the figure used as the benefit’s multiplier; the number of years’ worth of salary averaged as part of the equation; and whether a benefit should be capped at a certain percentage of that salary.

Other factors cited by BGR as contributing to rising costs include cost-of-living raises and deferred retirement programs, both of which it advises against.

Overall, BGR found that governmental pension plans offered in the three parishes were “generous when it came to almost all of these factors.”

In 2014, public pension plans across the U.S. were 74 percent funded, meaning that they could cover about three-quarters of the benefits owed to current and future retirees.

The 18 local plans examined by BGR were about 67 percent funded on average. Only seven met the 80 percent benchmark that experts consider healthy and that is recommended by the U.S. Government Accountability Office.

“Public employers that want to continue to offer a defined benefit plan should strongly consider changes to those plans to make them more affordable to the public,” the report said. “Policymakers can reduce the cost of pension benefits significantly by setting multipliers at or below the national median for public employees and raising the retirement age.”

Among other recommendations, BGR said pension plans should adopt an employee contribution rate that’s in line with the national median, which is 6 percent for employees who contribute to Social Security and 8 percent for those who do not. Locally, that would affect three plans by 1 percentage point.

BGR also recommended that benefit formulas should use a national median as a multiplier, or the rate by which retirement benefits accrue. Most of the 18 local plans are “far more generous than the national median,” the report said.

Reducing the multiplier would cut costs over time because benefits would accrue more slowly and workers would be encouraged to retire later, BGR said.

As Americans live longer than they did decades ago, when most plans were initially set up, the report also urged policymakers to establish a fixed retirement age that’s aligned with Social Security’s requirement, which is 66 or 67, depending on when a person was born. The local plans offer workers the potential to retire earlier than that and still receive full benefits.

Locally, all of the plans allow employees the opportunity to earn up to 100 percent of their final average compensation in retirement. In fact, when combined with Social Security benefits, the plans for New Orleans municipal employees and Sewerage & Water Board workers allow retirees to earn more than when they were working.

But setting a hard cap isn’t necessarily a common practice for public plans across the country, the report noted. A 2012 study that reviewed 87 state retirement plans found that 70 percent of defined-benefit plans had either a 100 percent cap or no cap at all.

The report recommends setting a cap on a sliding scale of an employee’s pre-retirement income — typically aiming for about 70 percent for retirees who do not also receive Social Security benefits.

Some of the other changes recommended by BGR would affect only a few of the plans. For example, it urged that at least a five-year period be used to calculate an employee’s average final compensation to determine retirement benefits. The longer the term, the lower the benefit, the thinking goes.

Sixteen of the 18 local plans already rely on a five-year period; only the state’s plan for firefighters and the S&WB plan use three years, and the S&WB is moving to a five-year standard in 2018.

Going further, policymakers could consider alternatives to the current pension plans — such as defined-contribution plans, hybrid plans that combine a defined contribution with a reduced defined benefit, and cash-balanced plans — in order to reduce the costs and risks tied to traditional pension systems, the report said.

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