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Current Issues - ORP Articles

From the LSU Faculty Senate Newsletter, January 2014

FISCAL OFFICE SOUNDS ORP WARNING SIREN
Those who became fans of the video link to the undersea spout that muddied the Gulf waters during the Deepwater Horizon crisis recognize that murk eventually rises into view even from the abysm. So it is that the Fiscal Office of the Louisiana Legislature has rung the alarm bell with regard to the impending dramatic cut in the “normal cost” for Optional Retirement Plan (“ORP”) participants. The “normal cost” is that portion of the employer contribution that reaches employee accounts; currently, that share is slated to plunge from 5.18% to 3.66%, a whopping 30% cut. In the December issue of Focus on the Fisc, the newsletter of the Legislative Fiscal Office, state financial experts remind legislators that the ORP normal cost is tied by law (but not by any explicable reasoning) to the normal cost for the defined-benefit plan, where savings resulting from a decrease in retirements, by lower end-of-career salaries, and by good portfolio performance have led to lower costs. The aforementioned phenomena are unfortunate enough for members of the defined-benefit plan, but, with respect to the ORP, they trigger a colossal $7,800,000.00 reduction in the sums paid to ORP participants. In effect, ORP members are penalized for the inadequate salaries of defined-benefit members and for the good investment strategies of defined-benefit portfolio managers despite having neither caused the lowering of wages nor benefitting from the defined-benefit portfolio. The fiscal experts warn legislators that failure to upgrade the ORP offering “could have a detrimental impact on recruitment of new faculty” and “may decrease employee morale and increase turnover of existing faculty and staff.” A table within the report
showslegislators that retirement contributions in Louisiana institutions fall far behind comparable regional institutions and that the compensation-package gap is even greater when Social Security contributions at most other institutions are included. The report is available here; see pages 7-8.

From the LSU Faculty Senate Newsletter, March 2014

FACULTY SENATE & LSUNITED SPONSOR FORUM ON RETIREMENT
- an on-the-scenes report by Anna Nardo and LSUnited colleagues

For the third year, the LSU Faculty Senate and LSUnited have joined forces to inform faculty members about the current state of faculty retirement plans. Whereas in the previous two years, the traditional defined benefits plan administered by the Teachers Retirement System of Louisiana (TRSL) was under legislative attack, this year the focus is on the Optional Retirement Plan (ORP). Employer contributions to the ORP are slated to drop to 3.66% next year. In the 1990s, the employer’s contribution averaged 7.1%; this year, it is 5.1%. What accounts for this precipitous decline—a decline that places LSU even farther behind peer institutions, including

  • Texas A&M (6.6&%)
  • Mississippi State (13.25%)
  • University of Nebraska (6.5%)
  • The average of southern state universities (8%)?

To answer this question, the Faculty Senate and LSUnited invited Katherine Whitney, Deputy General Council, and Dr. Lisa Honore, Public Information Director, for the Teachers Retirement System of Louisiana, to speak to the faculty on February 12 in the Atchafalaya Room of the Union. Close to 100 faculty members attended and peppered Ms. Whitney with questions. For those who were unable to attend, Ms. Whitney’s informative PowerPoint is posted on the Faculty Senate website (link: “Benefits and Retirement”).

Faculty questions at the forum indicate that the full explanation for the decline in employer contributions to the ORP requires some background. All faculty at LSU belong to the TRSL. They choose between two pension plans administered by TRSL: (1) the traditional defined benefit plan, first established in 1936; and (2) the ORP, introduced in 1990. Fifty three per cent of the LSU faculty have chosen the ORP, in which the employee contributes 7.95% of his/her salary, and the employer’s contribution matches the “normal cost” that the employer pays to TRSL in the traditional defined-benefit plan. (In simple terms, the “normal cost” is a calculation of the monies necessary to pay future benefits.) ORP retirement accounts are held with one of three approved carriers: ING Financial Services, VALIC, and TIAA-CREF. The employee makes all investment decisions and bears all risk. The ultimate retirement benefit in the ORP is based on the contributions to the employee’s account and the investment earnings.

TRSL’s actuary performs an annual valuation of both plans. This valuation projects required contributions necessary to finance the plan. The cost of benefits is funded over the employee’s career through the “normal cost.” Thus the employer contribution is calculated on two components: the “normal cost” and the payments needed to pay off the Unfunded Accrued Liability. (In simple terms, the UAL is the payment on the debt that has accumulated because of past legislative failure to fund state pension  plans.)

So what has happened in this system to cause the decline in the “normal cost,” the variable component of the employer’s contribution to the ORP? Ms. Whitney made clear what did NOT cause the decline:

  • Investment return has no effect on the “normal cost,” which is an actuarial calculation.
  • The UAL is calculated independently from the “normal cost.”
     

She attributed the decline to the following factors:

  • The employer contribution rate is determined for each TRSL subplan. Among the 2012 legislative changes to TRSL, some of which were declared unconstitutional, there was a provision that split higher education into a separate subplan. This provision, which is still in force, has removed higher education faculty from K-12 teachers. This split, which was intended to mitigate some of the damage that the 2012 changes would have caused to higher education retirement plans, has had the opposite effect, now that the other changes have been declared unconstitutional. If higher education faculty were still combined with K-12 teachers, the employer contribution projected for next year would have been 5.3%, rather than 3.6%.
  • Increased withdrawals (termination of employment prior to vesting or reaching retirement eligibility) and delayed retirements in higher education resulted in assumption updates, which decreased the present value of benefits.
  • Essentially, the increased number of higher education employees leaving the plan/terminating employment or delaying their retirement over the previous 5 years resulted in a decrease in the cost of the plan.
  • The plan’s decreased cost requires less funding and thus a reduction in the normal cost rate.
  • This complex combination of factors has resulted in the projected 3.66% contribution to the ORP.

Ms. Whitney also previewed for the faculty proposed legislation aimed at ameliorating this situation:

  • Senate Bill (SB) 23 (Guillory): Would allow active ORP participants to transfer into the TRSL regular retirement plan on an actuarial basis.
  • Benefit calculation and retirement eligibility would be based on the date of first employment that made a person eligible for state system membership.
  • The provision would end on June 30, 2020.
  • House Bill (HB) 6 (Pearson): Would establish a minimum employer contribution rate for the amount transferred to ORP participant accounts. The rate each fiscal year would be the greater of either
  • The equivalent of the employer portion of the normal cost or 6.25%.

LSUnited will be contacting faculty soon in order to organize a lobbying campaign focused on these legislative proposals. Moreover, members of LSUnited are meeting with President King Alexander to request that he testify to the appropriate House and Senate committees on the importance of this legislation to LSU’s ability to recruit and retain top-flight faculty.