Today the Bureau of Governmental Research (BGR) releases a new report, A Retreat on Pension Reform: City of New Orleans Reverses Steps to Rein in Sharply Rising Pension Costs by Increasing Benefits. The report examines the City’s decision last fall to retroactively increase pension benefits by 32% for about 1,000 employees hired since 2018, and all future hires, in the New Orleans Municipal Employees’ Retirement System (NOMERS). This rolled back a pension reform effort enacted just three years ago to address a steady weakening of the pension system’s finances and a steep rise in the public’s costs.
BGR’s analysis raises several concerns about the benefit increase:
- An opaque decision-making process prevented public discussion and input, leaving taxpayers unaware of the substantial new costs they must bear for decades to come.
- The City has not demonstrated problems with hiring and retention, nor that increasing pension benefits is necessary to solve them.
- The more generous benefits are significantly higher than national norms for public pension systems that participate in Social Security.
- The higher benefits rolled back efforts to control the public’s pension system costs, which ballooned from $5 million in 2008 to $33.9 million in 2019.
- City and pension system officials would not explain widely varying estimates of the public costs for the higher benefits.
- The pension system already has a $300 million gap between its assets and employees’ accrued benefits that will require the City to make large annual catch-up contributions for at least the next 25 years.
- While the City emphasized pension contributions will drop by an estimated $5.8 million in 2021, this is due to implementing a longer catch-up period, not an improvement in the system’s finances.
Based on this analysis, BGR makes the following key recommendations:
- The City Council should restore the more financially sustainable benefit structure from the 2017 pension reforms. While there are legal questions about whether the council can apply the reinstatement to current employees hired since the beginning of 2018, it is not prevented from doing so for future hires. If the City administration subsequently demonstrates any problems with hiring or retention in certain departments or positions, it should seek targeted, cost-effective and sustainable compensation changes to address them rather than an across-the-board pension increase.
- NOMERS officials, the City administration and the City Council should improve their stewardship of, and public accountability for, the weakening pension system. As BGR has previously recommended, this should include consideration of alternative retirement plan designs. For example, defined contribution plans or hybrid plans that combine defined contributions with a reduced defined benefit would shift some risk from employer to employees in exchange for greater plan portability if they change jobs. The officials also should explain the widely varying cost estimates for the benefit increases.
Click here to access the report, a two-page summary and the media release on BGR’s website.