BGR slams New Orleans for reinstating more generous pension payouts
By Jessica Williams
July 1, 2021
A recent hike in pension benefits for New Orleans municipal employees will cost taxpayers millions and is fiscally irresponsible, a nonprofit think tank said in a report Wednesday.
The Bureau of Governmental Research took aim at the city’s move in October 2020 to raise benefit payouts by 32% for a third of its administrative workforce and for all future hires, saying the city couldn’t prove that it had difficulty attracting and retaining employees under a less generous benefits structure.
The city’s decision was a quiet reversal of previous plans to reform the pension system and bring down costs.
BGR urged the city to adopt the less expensive benefits package, at least for future hires. The city should change pay, not pensions, if it’s having trouble attracting workers. And the entire pension system should be redesigned to offer a defined contribution or 401k-like option, the group said.
“The more generous benefits significantly exceed the national norm for public pension systems that participate in Social Security, such as the city’s,” BGR wrote.
City officials blasted the report in a lengthy statement late Wednesday, saying that their changes are unlikely to substantially increase the system’s debt or make it more difficult for the city to pay that debt.
Active member contributions are the biggest funding source for the system, not the city’s contributions, city spokesperson LaTonya Norton said.
The city’s changes also included a tweak to the method used to repay the system’s debt — officially its unfunded accrued liability — that allows that debt to be paid over a fixed 25-year period, instead of an indefinite period that can lead to higher costs, she added.
While the report touts 401K-like plans as a less expensive alternative, Norton said the city is only contributing 2.55% of its payroll to fund the retirement benefits of active workers, with the remainder of its annual contributions going to the system’s debt.
“It is certainly difficult to imagine that a meaningful retirement benefit could be provided for an employer cost of less than 2.55% of pay,” she said.
At issue in the report are the financial woes of the New Orleans Municipal Employees’ Retirement System, which provides pension benefits for roughly 3,000 city employees, excluding police and firefighters. That plan is valued at $481 million as of April, and its year-to-date investment performance is around 7.4%.
Employees pay a percentage of their salary to participate, as does the city. But the system has a $300 million gap between what it can pay out to all of its beneficiaries and how much it has, BGR noted. It has also become increasingly costly for the city to support, with the city contributing $33.9 million to it in 2019, compared to only spending $5 million on it in 2008.
To try and address the shortfall, the City Council cut pension benefits three years ago for employees hired in 2018 or later. Calculations used to determine those employees’ future benefits were tweaked to allow the city to pay less into the system; the city also increased the minimum retirement age from 60 to 62, and raised the minimum number of years one has to have worked to receive benefits from 10 to 20, among other changes.
But last year, as the city was struggling with falling tax revenue associated with coronavirus and related restrictions, the City Council followed through on a request by the administration and quietly and retroactively increased benefits by about 32% for 1,004 employees and for all future hires, the report noted.
Under the calculations approved in 2017, the city pays retirement benefits based on average annual pay for an employee’s final five years of service multiplied by 1.9%, and again by that employees’ total years employed. But the changes approved in October raised the “multiplier” percentage to 2.5%, which leads to more generous payments.
The 2020 changes also restored the so-called “rule of 80” that had been eliminated in 2017, which essentially allowed employees with 80 years of combined age and employment to receive benefits. And workers who sought early retirement were allowed to do so as early as age 60 and with a decade of service.
The cap on salary that can be used to calculate retirement benefits was also raised from $100,000 to $150,000.
An actuary noted that the changes would cost the city about $117 million over 30 years, though a second estimate found taxpayers would actually pay about $47 million over that timeframe, according to the BGR report.
BGR noted that the council’s move to increase pension costs came less than two weeks after the city announced that it was furloughing employees to save money.
“By enacting measures that successively reduced and increased personnel costs, the City appeared to be working at cross purposes, undermining its public message on the need for frugality,” staffers noted in the report.
The more generous pension payout is out of step with normal payouts, the think tank noted. The national median “multiplier” for systems such as the city’s that also pay into Social Security is 1.9%.
Norton took issue with that characterization, noting that “median” indicates that half of all multipliers in systems BGR studied were above 1.9%. “The BGR has provided no data about multipliers in excess of 1.9%, so it is difficult to assess whether and to what extent the 2.5% multiplier would be considered outside any ‘norm,'” Norton wrote.
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