CLICK HERE to view the press release.

Executive Summary

Louisiana has emerged as one of the most fascinating states in the nation for education reform. The state’s creative response to rebuilding the New Orleans education system in the wake of Hurricane Katrina is now considered a potential model for reformers across the nation. Gov. Bobby Jindal has carried the reforms further in pushing for “opportunity scholarship” vouchers in New Orleans, the grading of public schools A-F, and an effort to curtail social promotion of children needing additional reading intervention.

More recently, Gov. Jindal called for the adoption of one of the boldest parental choice measures ever: expanding the scholarship program statewide. Designed to help low- and middle-income families in underperforming public schools, this program would empower more parents to choose the best schools for their children.

In considering this proposal, Louisiana policymakers would benefit from studying the policy success of a neighboring state. Florida got a big head start on Louisiana in enacting reform, and the Sunshine State’s success proves that Louisiana can do better. Gov. Jindal’s 2012 choice initiative resembles a bolder version of one of Florida Gov. Jeb Bush’s signature reforms: the A+ Opportunity Scholarship Program. The figures to follow demonstrate that the Florida program helped in improving the academic performance of struggling Florida public schools.

Data from the National Assessment of Educational Progress (NAEP) exams will demonstrate the benefits of Florida’s head start in adopting a comprehensive set of education reforms. In addition, evidence regarding the efficacy of parental choice programs around the nation will be provided.

Louisiana has adopted some key elements of the Florida reform strategy as part of the Pelican State’s overall K-12 reform effort. The adoption of one the nation’s largest parental choice plans will only help spur further improvement for students in need of more effective learning environments.

What Florida has done, Louisiana can do better.

To read the full report, download a copy by CLICKING HERE.

Featured Speakers:
Senator David Vitter
Lt. Governor Jay Dardenne
Grover Norquist- President, Americans for Tax Reform

Monday, December 12, 2011
7:30am to 6:30

at

Hilton Baton Rouge Capitol Center
201 Lafayette Street
Baton Rouge, LA

Complete Information for the event can be found here.

Private Dinner Featuring Karl Rove

Information regarding the Private Dinner with Karl Rove can be found here.

November 10, 2011
5:30 pm

Featured Speaker: John O’Leary, Co-author of: If We Can Put a Man on the Moon: Getting Big Things Done in Government

at

The IP Building
643 Magazine Street
New Orleans, LA 70130

Cost: $20 per person

Drinks and hors d’oeuvres will be provided.

RSVP: Purchase online by clicking here or at the door by emailing events@pelicaninstitute.org

July 29, 2011
12:00 pm

Featured Speaker: Robert L. Bradley Jr., Founder and CEO of Institute for Energy Research

Special Guest: Congressman Bill Cassidy

at

Plimsoll Club in the Westin Canal Place
100 Rue Iberville
New  Orleans, LA 70130

Cost: $25 per person

RSVP: Register online by clicking here or call (504) 599- 5664 or email info@pelicaninstitute.org.

The Case Against Tax Increment Financing

June 30, 2011
6:30 – 9:30 pm

Reception & check-in: 6:30-7:30 – Cash Bar
Buffet Dinner: 7:30-8:15
Guest Speakers: 8:15-9:30
at
River Oaks Center, Napoleon Room
520 E. Kaliste Saloom Road
Cost: $40 per person

Despite national attention on Wisconsin and its governor’s efforts to balance the state budget and limit public employee collective bargaining, the fiscal health of its public pension and retiree health obligations went largely unnoticed. Wisconsin’s pension system has, up to now, been fully-funded.

Governor Walker proposed that state government employees increase their retirement pension and health care contributions. Governor Jindal’s 2011-2012 budget, released earlier this month, also calls for increasing public employees’ pension contribution rates for government workers.

Although Jindal is taking a page from Governor Walker’s playbook, he will need to do more. This reform addresses only one of the four pension systems and barely makes a dent in the state’s unfunded pension liability that totals over $18 billion.

The Proposed Budget

Under the proposal, Louisiana State Employees’ Retirement System (LASERS) workers would increase their contributions from 8 to 11 percent of pre-tax wages. While a pension fund should hold assets worth at least 80 percent of its total obligations, LASERS holds a mere 57.7 percent. The Governor’s proposal would increase the program’s funded ration to an only slightly better 58.3 percent – still leaving all four pension programs at a funding level of less than 61 percent.

Wisconsin versus Louisiana

According to a 2010 report from the Pew Center on the States, Wisconsin is one of only three states in the country that is a “solid performer” in managing both its pension and non-pension benefit obligations. Louisiana on the other hand, earned the lowest grade, “serious concern,” for management of its state pension obligations and “needs improvement” for its non-pension benefit obligations.

Figure 1. Wisconsin vs. LouisianaSource: The Pew Center on the States, “TheTrillion Dollar Gap: Underfunded state retirement systems and the roads to reform,” February 2010, pp. 56-57.

While Louisiana has done a better job of funding the pension part of these benefits over the past decade, an ominous shortfall remains. According to the State of Louisiana Comprehensive Annual Financial Report for 2010, the total unfunded liability of the state’s four public pension programs is over $18 billion. This is in addition to the state’s other post-employment benefits (OPEB) – retiree health care and life insurance – which are completely unfunded to the tune of $11.5 billion.

What Next?

While Wisconsin maintains a defined benefits approach to pensions, there is broad and growing recognition in state houses across the country that the current defined benefit approach to government retirement plans is fiscally unsustainable. Eighteen states have already adopted the defined contribution approach in their retirement systems. In addition, Louisiana’s Lottery Corporation employees participate in a defined contribution plan.

This challenge created by defined-benefit plans begs for an honest and open discussion between Louisiana lawmakers and citizens. In particular, this dialogue needs to address how we can still deliver these promised retirement benefits to government workers.

Given Louisiana’s precariously unfunded pension liabilities and lack of proposals to shore them up, a defined contribution approach warrants immediate consideration. Workers contribute a specified amount of their earnings into an individually-owned retirement account, similar to a 401(k). Defined contribution plans are not new and are widely available in the private sector. Existing workers could remain in the current program or switch to the new plan, and new workers would automatically enroll in the new plan. For taxpayers, the biggest advantage of converting to a defined contribution approach, where the state contributes a specified dollar amount to the employee’s own plan, is that the long-term costs would be predictable and transparent.

Currently, a state committee annually sets pension contribution rates, and the state contribution is now 22 percent of wages for regular employees under the state’s largest pension program. The employee contribution is 8 percent for workers hired after July 1^st, 2006, and 7.5 percent for workers hired before. Since the pension system is severely underfunded (originally created as a Ponzi, pay-as-you-go system), these dramatically rising contribution rates reflect payments that are immediately required to pay benefits to current government retirees.

While the government rate has fluctuated over the past decade, it is now at its highest level. By comparison, when originally enacted the employer contribution rate was 6 percent and the employee rate was 5 percent. See Figure 2. Regardless, even with the proposed employee contribution at 11 percent, the program will remain fiscally unstable.

The program’s budget shortfalls are due to underfunding the program in past years and the program’s fundamentally flawed structure that is based on a pay-as-you-go, Ponzi scheme where today’s program participants and taxpayers pay the benefits of today’s retirees. While the state is currently facing declining revenues and continued fallout from the economic downturn, the program already faced similar difficulties in robust economic times.

Left unreformed, the prospect of benefit cuts and increases in the age of retirement eligibility loom. Concurrently, the state and its employees will face continuously increasing contributions to this doomed system.

Figure 2. LASERS Historic Agency Contribution Rates

Got Peace of Mind?

Investing in an individually-owned account will also prove less risky than reliance on an underfunded program. While federal law requires that private sector employers hold assets of at least 80 percent of promised pension benefits, state-sponsored pension programs, such as Louisiana’s, are exempt.

Additionally, willing employees can easily minimize risk by how they choose to allocate their funds. For example, most defined-contribution programs, such as the federal employee and military Thrift Savings Plan, allow workers to invest in broad stock or bond index funds. While the rate of return varies from year-to-year, investors do not face high risk.

If that is still not enough, the state could adopt a hybrid approach – a retirement benefit based on both the current approach and defined contributions, which several states have already adopted. For example, one third of the retirement contribution would fund a defined benefit payment and two-thirds of the retirement contribution would fund a defined contribution benefit payment.

Government workers may not realize that their retirement security can be impacted by political forces beyond their control. This is particularly true for newer employees. Reform can protect taxpayers and future workers from future unfunded liabilities. And government workers can enjoy an ownership stake in their retirement that cannot be altered in times of financial crisis or political turbulence.

Political Courage and Leadership

By some measures, Louisiana’s pension systems are among the worst in the nation. A pension fund should hold assets that are worth at least 80 percent of its total obligations. Yet all four of the state’s public pensions hold less than 61 percent (based on the state’s most recent financial report for 2010). When other post-employment benefits are taken into consideration the picture is even grimmer.

This crisis was decades in the making. While solutions such as defined contribution plans may be complex and difficult to achieve politically, continued inaction will perpetuate an outdated system that fails taxpayers, government employees, and future Louisiana workers alike.

American preacher and author James Freeman Clarke once wrote, “A politician thinks of the next election. A statesman, of the next generation. A politician looks for the success of his party; a statesman for that of the country. The statesman wished to steer, while the politician was satisfied to drift.” There is no doubt that the current budget battle will be intense and will require an enormous amount of political courage if we are to set a better course for the state’s future. Let’s hope that we have statesmen who are up to the task.

Naomi Lopez Bauman is a public policy consultant and a Pelican Institute adjunct fellow. She holds a B.A. in economics from Trinity University and a M.A. in government from The Johns Hopkins University. She lives in Shreveport with her husband and two children.

Taxpayers on the hook for billions of dollars in unfunded liabilities

Louisiana Governor Bobby Jindal has received national accolades for the state’s fiscal discipline under his leadership. The libertarian Cato Institute, for example, ranked Jindal as the second-best governor in the nation in its fiscal policy report card for 2010. According to Jindal, the “Louisiana Way Forward,” unlike the Washington approach, is for the state government to live within its means even in economic downturns.

While Jindal’s attempts to make government do more with less get high marks on paper, the stark reality is that Louisiana is still on course for fiscal catastrophe. State officials are bracing for an estimated $2 billion shortfall in the next fiscal year, but this is the tip of the iceberg. We face a more alarming long-term problem: Louisiana’s underfunded pensions. This problem could dwarf the annual budget shortfall and it requires immediate attention from state policymakers.

Pension Deficit Disorder

The state is operating four public pension programs – Louisiana School Employees’ Retirement System (LSERS), Louisiana State Employees’ Retirement System (LASERS), Louisiana State Police Retirement System (LSPRS) and Teachers’ Retirement System of Louisiana (TRSL). Established in the 1930s and 1940s, these programs are state-sponsored retirement pension plans, or “defined benefit” plans, that manage retirement contributions from the state and the employees and then pay a specified benefit amount to qualified state employees in the future during their retirement. All four programs are severely underfunded.

According to the most recent actuarial estimates, the total unfunded liability of the four programs is over $18 billion. This is in addition to the state’s other post-employment benefits (OPEB), which are retiree health care and life insurance. These non-pension benefits are completely unfunded to the tune of $11.5 billion. In other words, the state of Louisiana has promised to pay state employees retirement and health benefits, but is short by almost $30 billion.

Given the magnitude of this situation, one has to wonder when Baton Rouge is going to acknowledge the problem and take the “Louisiana Way Forward” approach to this fiscal calamity in the making. If it remains unaddressed, this fiscal disaster could diminish the prospects of future generations in Louisiana. See Figure 1.

Figure 1. Louisiana’s Fiscal Challenge (in billions of dollars)

As shocking as these liabilities are, they are calculated using overly optimistic scenarios. For example, the estimates for Louisiana’s pension shortfall assume a generous rate of return on the pension funds’ investments. LASERS and TRSL assume investment returns of 8.25 percent per year. LSERS and LSPRS assume a more reasonable 7.5 percent. Yet, both assumptions are too optimistic in today’s economic climate. For example, LASERS had an investment yield (based on the actuarial value of assets) of 5.73 percent for the past 5 years, 3.77 percent for the past ten, and 7.54 percent for the past twenty – far lower than the plan’s anticipated 8.25 percent. If more realistic rates of return were used, the projected unfunded liabilities would be even higher.

Federal law requires that private sector employers hold assets of at least 80 percent of promised pension benefits. Unfortunately, Louisiana government employees and taxpayers receive no such protection because state government pension funds are exempt. For 2010, the state’s four pension plans had funding ratios between 54.4 percent and 61.0 percent. Not only do all the state’s plans fall below federal requirements for private businesses, the state’s funding ratio falls to 43.7 percent when including the state’s OPEB.

One wonders why state leaders allow the Louisiana pension and retirement benefit systems to operate with less than 50 cents in assets for every dollar in promised benefits. See Figure 2. While the economic downturn has heightened awareness and spurred some states to act, Louisiana lawmakers have not taken adequate steps to address this potential crisis.

Figure 2. Funded Ratios for State Pension and OPEB Programs

Reality Check

Louisiana taxpayers will foot the bill for the reckless and irresponsible financial decisions. “Kicking the can down the road” may be politically safe but lawmakers can no longer ignore their fiscal responsibilities. After all, the longer these programs go unreformed, the worse the problem becomes. Currently, the unfunded liability of these programs is the equivalent of more than $8,800 for every adult resident of the state.

The time has come for Louisiana lawmakers and citizens to hold honest and open discussions about the state’s fiscal future, including the best ways to meet the state’s obligations and deliver promised benefits to government workers in their retirement years. There is growing recognition across the country that the defined benefit approach to retirement is unsustainable.

Where Do We Go From Here?

Rather than continue this calamitous path, lawmakers should examine the conversion of current “defined benefit” plans into “defined contribution” plans, similar to a 401(k) or IRA account. This approach, already available to the state’s Louisiana Lottery Corporation employees, is an option in several state pension programs, including those in Nebraska, Michigan, Florida and West Virginia.

In this scenario, current employees could choose between staying under the current program and switching to a new plan. New employees would automatically be enrolled in the new plan, where the state contributes a specified dollar amount to the employee’s retirement account. This defined contribution system would make the long-term costs far more predictable and prevents the creation of “Ponzi schemes” which place a growing burden on taxpayers to keep them going. State retirees would have legal ownership over their retirement accounts and could will these accounts to their heirs.

Transitioning away from defined benefit plans would also end the practice of incentivizing employees to remain at a job simply to collect a generous pension down the road. As is the case in the private sector, workers could move more freely from job to job without fear of losing their retirement savings.

Louisiana’s unhealthy pension program poses a threat to everyone who relies on the state’s ability to perform essential services. This threat is particularly grave for current and future taxpayers, who will see a larger and larger share of their payments directed to funding generous retirement benefits. While pension reform may not make scintillating national headlines, it should be lawmakers’ top priority.

Update: On February 2 Garland Robinette, host of The Think Tank radio show, interviewed Kevin Kane, president of the Pelican Institute, regarding the ramifications of this report. Click below to listen (nine minutes).

Naomi Lopez Bauman is a public policy consultant and a Pelican Institute adjunct fellow. She holds a B.A. in economics from Trinity University and a M.A. in government from The Johns Hopkins University. She lives in Shreveport with her husband and two children.