Over-Manipulated and Under-Funded: Louisiana's Pension Problem and Its Impact on Public Employees

• Author: Alyssa Depew
• Position: J.D./D.C.L., 2018, Paul M. Hebert Law Center, Louisiana State University.
• Pages: 673-704

Over-Manipulated and Under-Funded: Louisiana ’ s Pension Problem and Its Impact on Public Employees TABLE OF CONTENTS Introduction .................................................................................. 674 I. Understanding Retirement: The Social Security Act and Louisiana State Pension Systems .......................................... 677 A. The Social Security Act ......................................................... 678 B. Louisiana’s Public Pension Systems...................................... 680 II. The Dire Financial State of Louisiana’s Two Largest Pension Programs: LASERS and TRSL ...................................... 682 III. Social Security Perks: Are Public Employees in Louisiana Missing Out? ............................................................... 684 A. How Could Louisiana “Opt-in” to Social Security, and What Would the Consequences Be? ............................... 684 B. Empirical Strategy and Data Analysis ................................... 688 1. An Introduction to the Difference-in-Difference Framework ...................................................................... 688 C. Application of the Difference-in-Difference Estimation Strategy ................................................................ 690 1. Louisiana vs. Alabama .................................................... 690 2. Teachers in Non-Section 218 States vs. Teachers in Section 218 States ....................................................... 693 IV. Reform Measures for Louisiana and Other Non-Section 218 States ..................................................................................... 695 A. Strategies to Modify Existing Pension Structures ................. 695 1. Make Money Before Spending Money ........................... 696 2. Let’s Swap: Defined Benefit for Defined Contribution .................................................................... 697 B. Minimize Moral Hazard Through Lawmakers and Taxpayers ........................................................................ 698 1. Promote Lawmaker Responsibility ................................. 699 2. Address Taxpayer Passivity ............................................ 700 C. Incentivize Public Employees to Maximize Current Contributions ............................................................ 702 Conclusion .................................................................................... 704 674 LOUISIANA LAW REVIEW [Vol. 78 INTRODUCTION A well-dressed salesperson is explaining to a potential customer, Bernie, an investment opportunity that will provide high returns with little to no risk. All Bernie has to do is deposit a percentage of his salary each month into a larger fund that will be invested in the stock markets by experts. When Bernie needs money someday, the funds will have grown exponentially. Additionally, some of Bernie’s hard-earned money will be used to pay out customers who have invested during prior years because the investments are not generating a large enough return to pay everyone what was promised. At first Bernie thinks he is hearing a pitch for a classic Ponzi scheme, 1 but, as it turns out, the salesperson is giving a description of a public pension system. 2 Scholars have argued that public pensions are similar to Ponzi schemes, with the major difference being that the latter are illegal. 3 This criticism may be harsh; after all, pensions are not created with the intent to defraud employees out of their hard-earned money with the promise of guaranteed investment returns. Public pensions, however, do have a “consistent theme of understating liabilities, overstating assets, and pushing costs into the future.” 4 For public employees, retirement concerns are mounting in light of the nationwide public pension crisis, resulting from mismanaged funds and Copyright 2017, by ALYSSA DEPEW. 1. Ponzi Schemes, U.S. SECURITIES AND EXCHANGE COMM’N, https://www .sec.gov/answers/ponzi.htm (last visited Sept. 22, 2017) [https://perma.cc/P947-3PLX]. A Ponzi scheme is an investment scheme in which the operators attract new investors by promising to generate high returns with little to no risk. The funds taken from the new investors then are used to pay existing investors, disguised as high returns. Id. 2. Definitions, INTERNAL REVENUE SERV., https://www.irs.gov/retirement-plans /plan-participant-employee/definitions (last visited Sept. 22, 2017) [https://perma.cc /7UXG-2EVL]. A traditional pension plan promises the participant a specified monthly benefit at retirement. Often, the benefit is based on factors, such as the participant’s salary, age, and the number of years she worked for the employer. Id. 3. See, e.g., Christopher Carosa, Are Pensions Merely Ponzi Schemes?, FIDUCIARY NEWS (Aug. 28, 2014), http://fiduciarynews.com/2014/08/are-pensions-merely-ponzi-schemes/ [https://perma.cc/E7AP-ENEX]. 4. JOE NATION, STAN. INST. FOR ECON. POL’Y RES., PENSION MATH: HOW CALIFORNIA’S RETIREMENT SPENDING IS SQUEEZING THE STATE BUDGET 15 (Dec. 13, 2011), https://www.scribd.com/document/75598848/Pension-Math-How-Califor nia-s-Retirement-Spending-is-Squeezing-the-State-Budget [https://perma.cc /3NP8-LLEG]. 2017] COMMENT 675 empty promises. 5 To date, public pensions nationwide are over $900 billion short of the amount that governments have promised to their workers in pension benefits for a given fiscal year. 6 Although pension problems transcend state borders, Louisiana’s pension systems are especially underfunded. 7 In a 2016 study, the two largest systems in Louisiana were ranked in the top 25 most underfunded systems across the United States. 8 Public-sector employees in Louisiana, particularly teachers, have limited retirement plan options when they enter the workforce. Most public employees are required to pay into a statewide pension plan, 9 the two largest being Louisiana State Employees’ Retirement System (“LASERS”) and Teachers’ Retirement System of Louisiana (“TRSL”). 10 LASERS and TRSL are categorized as defined benefit plans, which give the retired employee a fixed income, usually calculated as a percentage of the employee’s highest earning salary years. 11 5. See JOSHUA D. RAUH, HOOVER INST., HIDDEN DEBT, HIDDEN DEFICITS 1–2 (Apr. 11, 2016), http://www.hoover.org/sites/default/files/research/docs/rauh _debtdeficits_36pp_final_digital_v2revised4-11.pdf [https://perma.cc/5C9C-HE6 Y]. Most state and local governments provide retirement benefits to their employees through guaranteed pension programs. The government body contributes taxpayer money to public systems to fund these promises. Despite states’ optimistic assumptions about future investment returns, assets in the pension systems will be insufficient to pay for the pensions of current public employees and retirees and eventually will have to be supplemented heavily by additional taxpayer dollars to make up the difference. Id. 6. PEW CHARITABLE TRUSTS, THE STATE PENSION FUNDING GAP: 2014, at 1 (Aug. 24, 2016), http://www.pewtrusts.org/en/research-and-analysis/issuebriefs /2016/08/the-state-pension-funding-gap-2014 [https://perma.cc/8EW6-H7KX]. 7. REBECCA A. SIELMAN, MILLIMAN, 2016 PUBLIC PENSION FUNDING STUDY 8–10 (Sept. 2016), http://www.milliman.com/uploadedFiles/insight /Periodicals/ppfs/2016-public-pension-funding-study.pdf (analyzing data from 2014 and 2015 for the 100 largest pension programs in the United States) [https://perma.cc/QN9J-VCT2]. 8. Id. 9. Some public employees in Louisiana may choose the Optional Retirement Plan (“ORP”) instead of selecting TRSL. ORP is a defined contribution plan administered through private carriers. Optional Retirement Plan (ORP), TEACHERS’ RET. SYS. OF LA., https://www.trsl.org/main/optional_programs/optional_retirement _plan (last visited Sept. 22, 2017) [https://perma.cc/64G2-VCEW]. 10. State Data: Louisiana, PUB. PLANS DATA (2015), http://publicplansdata .org/quick-facts/by-state/state/?state=LA [https://perma.cc/4ZG2-MEGM]. 11. Choosing a Retirement Plan: Defined Benefit Plan, INTERNAL REVENUE SERV., https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-defined -benefit-plan (last updated Oct. 20, 2015) [https://perma.cc/R8KU-5NRX]; Retirement Topics – Defined Benefit Plan Benefit Limits, INTERNAL REVENUE 676 LOUISIANA LAW REVIEW [Vol. 78 Public employees in Louisiana lack the option to pay into Social Security, precluding these employees from receiving the additional retirement benefits that the federal program provides. 12 Although states are not required to offer public employees the option to pay into Social Security, Louisiana’s state retirement system for public employees must provide benefits substantially equivalent to Social Security benefits to qualify as an alternative to the federal program. 13 With some of the most underfunded pension systems in the United States, Louisiana’s solution to its pension crisis should be a multi-faceted approach from four angles. First, any efforts to supplement the current framework with Social Security benefits must be considered carefully because it is unclear whether public employees participating in Social Security are in a more advantageous position at retirement than non-participants. 14 Second, the legislature should enact corrective measures to restrain political leaders whose underfunding of current pension programs has caused much of the long-term harm. 15 Third, public employers must modify the current pension structure to mitigate the damage that has been SERV., https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-defined-benefit-plan-benefit-limits (last visited Sept. 22, 2017) [https://perma .cc/6UJG-MSX2]. For example, if a person’s highest earning wage was $75,000 for the last few years of her career, then the defined benefit payout would be a percentage of that amount. Id. 12. TASK FORCE ON STRUCTURAL CHANGES IN BUDGET & TAX POL’Y, LA. DEP’T. OF REV., LASERS AND TRSL RETIREMENT SYSTEMS OVERVIEW 3 (Aug. 12...