Testimony: Louisiana Senate Bill 438 could cause public pension woes

A version of this testimony was given to the Louisiana Senate Committee on Retirement on April 25, 2022.

Thank you for the opportunity to share our project’s perspective on Senate Bill 438 (SB 438) and the proposed new hybrid retirement benefit under the Louisiana State Employees’ Retirement System (LASERS). 

My name is Ryan Frost, and I serve as a policy analyst for the Pension Integrity Project at Reason Foundation. Prior to joining Reason, I spent seven years as the research and policy manager for the Law Enforcement Officers and Firefighters Pension System in Washington state. Our team has engaged stakeholders in Louisiana dating back to 2016, offering quantitative research and pro-bono technical assistance to advance retirement security for public servants in a financially responsible way.  

Proposing an alternative benefit design to offer new public employees is commendable because even after the historic investment returns in 2021, LASERS is still only 66% funded with $6.8 billion in unfunded pension obligations. Although current amortization schedules are set to retire some of that debt, market forecasters also expect returns to be less than what LASERS actuaries assume across all asset classes. Lower returns would increase the probability of more unfunded liabilities in the near future.  

LASERS’ financial health aside, the plan’s current benefit structure is grossly inadequate for most public employees. Only 2.5% of new hires joining LASERS at age 35 will stay in the system long enough to accrue a full retirement benefit. Seventy percent of LASERS members leave with only their employee contributions to return to them (without interest). The current LASERS benefit is simply not designed for the modern public employee. These increasingly mobile employees are being penalized in Louisiana when leaving public employment. 

While previous attempts to implement a hybrid LASERS benefit—most notably back in 2018 under Senate Bill 14—would have addressed these issues, this current proposal includes changes that would likely prevent the state and taxpayers from seeing any meaningful cost reduction or financial risk reduction. 

Reason Foundation found that the use of a 1.8% multiplier (as outlined under the guaranteed benefit portion of the bill) would make LASERS an extreme outlier among hybrid plans. For example, the State Teachers Retirement System of Ohio whose members, like LASERS members, do not pay into Social Security operates using a 1% multiplier. Hybrid defined benefit (DB) and defined contribution (DC) designs typically use a 1.0%-1.25% multiplier for the guaranteed benefit and a more prominent defined contribution portion to broaden the number of members served by the plan. 

Another feature of this proposed plan that would be less than ideal for employees is the stipulation that hybrid members must annuitize their DC balances within LASERS. If a member separates from service for any reason (including retirement) and they want to withdraw their DC money in a lump sum, they are forced to also withdraw their DB contributions and forfeit any accrued pension benefit. They forfeit that benefit and all employer contributions made to the DB as well while gaining zero interest on any contributions made to the DB. 

No other hybrid plan has this stipulation. For a typical hybrid plan, if a member separates mid-career, they can take their DC money with them and leave their DB account alone. If a member separates at retirement–no matter what they choose to do with their DC balance–they may either receive their accrued pension or take a refund of all DB contributions (both employer and employee contributions plus interest). 

Adding this anomalous stipulation unduly jeopardizes members’ retirement security. Employees should be allowed to keep their DB benefit intact even if they withdraw their defined contribution benefit. In the end, the guaranteed benefit portion of the proposed hybrid plan slightly increases benefits for new hires while maintaining the same cost and risk challenges that led to LASERS’ current funding issues.  

While a new hybrid design for LASERS members could be a prudent step forward, Senate Bill 438, as currently drafted, lacks the risk and cost-saving mechanisms of other better-designed hybrid plans.  We commend legislators, members, and stakeholders willing to examine these important public pension issues and thank you again for the opportunity to share our perspective.