Councilwoman Stacy Head proposes money-saving changes to city retirement system

By Jeff Adelson

Source: The Advocate

March 7, 2017

New Orleans City Councilwoman Stacy Head is proposing changes that would make the city’s main pension plan less generous for new employees and those hired in the past 10 years — changes she said are necessary for the long-term viability of the system.

The changes would mean newer employees — who make up almost two-thirds of the workers enrolled in the New Orleans Municipal Employees’ Retirement System, or NOMERS — would accrue benefits at a slower rate and new hires would have to work longer before being vested in the system or becoming eligible for retirement.

The proposal also would either do away with cost-of-living adjustments for all retirees until the system is nearly fully funded or else require the city and employees to kick in extra money to fund those increases.

“This is primarily to provide a sustainable pension plan for our lifetime and our children’s lifetime,” Head said.

The proposals, which Head’s office estimated would save the city about $4 million a year, would have to be approved by the City Council. Whether most council members would want to deal with them in an election year is unknown; Head is not eligible for re-election.

The proposals follow years of discussion by Head and others about potential changes to NOMERS, which has seen its funding level fall and employer contributions rise as it struggles to overcome the lingering effects of the 2008 financial crisis.

While the plan is in relatively good financial shape, Head said her changes are aimed at staving off more serious problems down the line.

NOMERS covers most city employees and, until the last decade, had been in the enviable position of having more money than it needed to cover the cost of their retirement. That was in stark contrast to well-publicized problems faced by the New Orleans Firefighters Pension and Relief Fund, the essentially broke system that has been the source of years of political and legal fights between rank-and-file firefighters and the Landrieu administration.

But the health of the NOMERS system began to slide even before the financial crisis, which caused massive losses for pension plans across the country. The repercussions of those losses are still being grappled with by the system.

“That kind of loss in value is not something that you rebound from overnight,” said Jesse Evans Jr., the system’s director.

In recent years, the city has sought to cover that gap by increasing the amount employees contribute to the system, raising it from 4 percent of their paychecks to 6 percent. The city, which is required to pay the remaining amount needed to make sure there will be enough money available when employees retire, has seen its contributions to the plan increase from about $5 million in 2008 to about $21.9 million in 2015, according to Head’s office.

NOMERS now stands at about 72.4 percent funded. Few systems in the country are fully funded, and 80 percent funding, a threshold private plans are required to meet, has long been used as a benchmark for a healthy plan. However, Head and others have argued that level is too low.

“I’d like to have a much more healthy pension system because if we run into another market crash or another major slump over several years or, heaven forbid, another serious financial drain on the city like another Katrina in the not-too-distant future, our pension system will be even more vulnerable,” Head said.

Under her proposal, employees with more than 10 years of service would be largely unaffected. Those with fewer than 10 years with the city would see the annual rate at which they accrue benefits drop from 2.5 percent of their pay to 1.9 percent for all future years, would see their maximum benefit capped at $100,000 and would be eligible only for a less generous version of the DROP program, which allows employees to get additional money for working beyond their typical retirement age.

About 73 percent of city employees have fewer than 10 years of service, according to Head’s office.

New employees would start out at the lower accrual rate, would have the same benefit cap and would have to work longer to retire. Those employees would have to put in at least 20 years to retire at age 62, 10 years to retire at 65 or 30 years to retire at any age. The system now allows employees to retire at 60 with 10 years of service, at 65 with five years of service or at any age with 30 years of service or when their age plus their years of service add up to 80.

Those new employees would also not be eligible to receive a pension for their first 10 years instead of the current five and would be ineligible for DROP.

Retirees would also be unable to receive a cost-of-living increase unless the plan was 95 percent funded or unless the city and employees both contributed more money to pay for those increases.

Head’s proposal, which draws from some of the recommendations in a report by the nonpartisan Bureau of Governmental Research last year, has the support of the Business Council of New Orleans and the River Region.

Mayor Mitch Landrieu’s office did not respond to a request for comment.

The board of NOMERS has endorsed two of the proposals in the plan dealing solely with new hires: the increase in the retirement age and a longer period before employees become vested.

The other portions of the plan have not yet come up for a vote by the board, in part because they have not yet been legally vetted, Evans said.

While some observers have called for changing from a pension system to a plan similar to a 401(k), Head said she did not think such a move would be good for city employees.

“A pension system is the most rational system for retirement for our employees,” she said.

Editor’s note: This story was updated on March 8 to correct incorrect information about NOMERS’ funding level and the payments made by the city.

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