A five-point guide for understanding — and possibly solving — Louisiana’s biggest pension problem: Unfunded Accrued Liability.

By JEREMY ALFORD

Lether Frazar (1904-1960) who legislatively created Louisiana’s first major pension system -- without the money it needed to pay all future benefits. ---University Archives and Acadiana Manuscripts Collection, Edith Garland Dupré Library, University of Louisiana at Lafayette.

Many lawmakers scratch and claw and scramble to get re-elected. They know power begets power and they know incumbency is further fuel. But they obviously don’t know that one term is sometimes enough to leave a lasting legacy.

Just consider that this new term in state government will likely witness Louisiana’s total unfunded accrued liability surpass the $20 billion mark. Depending how lawmakers and the administration react, that figure may mushroom into their collective legacy.

A lot can happen in one term. Just ask Lether Frazar. Or don’t — he died roughly 52 years ago. He’s one of those political characters from Louisiana’s past with connections to cataclysmic events, but very little modern name recognition. An incidental character.

Nonetheless, Frazar had a claim to fame. It was serving as lieutenant governor under Earl K. Long. Most notably, Frazar helped Uncle Earl bust out of a mental facility in Mandeville, where his family had him committed like a sock-wearing rooster. That is, Frazar cosigned Long’s order to fire the hospital superintendent.

But that was several years after Frazar served a single term in the Louisiana Legislature. From 1936 to 1940, he carried the policy torch in the state House for Beauregard Parish. He also carried political water for Louisiana’s teachers, as evidenced by his very first year in the Lower Chamber.

That was when Frazar became the godfather of the teachers’ retirement system as we know it today. He championed the original law, ushered it through the Capitol and lobbied for gubernatorial approval.

Despite his role in what is certainly one of the state’s craziest political tales, it is Frazar’s milestone contribution to Louisiana’s pension system that has relevance in 2012.

The newly-seated Legislature will kick off its first year with a watershed education reform agenda. While aggressive plans to address the state’s unfunded accrued liability, or UAL, have yet to be floated, this would be an opportune time, even though the UAL’s tentacles touch and infect much more than education.

That’s why THE PELICAN INSTITUTE is offering up this five-point guide to understanding the UAL, from how it originated and what kind of impact it’s having to national trends and possible solutions.

To see historical membership data for the teachers’ system, click HERE. 

1.) WHAT IS THE UAL?

State Rep. Kevin Pearson, R-Slidell, the chairman of the House Retirement Committee, said strides have been made in recent years addressing the UAL, but “there's much more to do.”

It’s best to start with the basics. The state runs four separate retirement systems: the Louisiana School Employees’ Retirement System, Louisiana State Employees’ Retirement System, Louisiana State Police Retirement System and Teachers’ Retirement System of Louisiana.

These systems function as you might expect. Members are offered defined benefit plans that pay out specific retirement benefits based on a number of factors, primarily salary and years of employment.

When you hear someone refer to unfunded accrued liability in terms of these retirement systems, or read an article by a journalist about the UAL, they’re referring to the gap between what the systems have on hand to pay future benefits versus what they’ve promised. To put it another way, just consider the UAL as the difference between what the systems have available to them and the amount that would be needed if everyone retired at one time.

When the Louisiana Legislative Auditor’s Office investigated the UAL last spring, the total price tag weighed in at $18.2 billion. By the time the current fiscal year commenced in early June, another $300 million was added to the tally, making for a UAL that’s actually closer to $18.5 billion.

To put that figure into perspective, every man, woman and child in Louisiana would need to pony up somewhere in the neighborhood of $4,090 to retire the state’s entire pension-related UAL.

The Teachers’ Retirement System of Louisiana leads the way, accounting for $10.8 billion of the UAL. The Louisiana State Employees’ Retirement System is on the hook for $6.4 billion. Meanwhile, the School Employees’ Retirement System is responsible for $905 million and the State Police Retirement System $339 million.

State Rep. Kevin Pearson, R-Slidell, the chairman of the House Retirement Committee, likens the UAL challenge to the proverbial elephant in the room. In this case, ignoring it means putting Louisiana’s future in jeopardy.

“Paying down the UAL to prevent collapse of public retirement systems will keep us and future generations from having to bail out the systems,” Pearson said.  ”While we’ve made some headway there’s much more to do.”

So exactly how serious is this whole thing? According to a recent Northwestern University study, Louisiana — if it basically does nothing — will see its pension programs completely run out of money by 2017. Under such a scenario, the state would either have to come up with money, which equates to pulling dollars out of the general fund, or default.

But not everyone buys the dire predictions. Cindy Rougeou, executive director of the Louisiana State Employees’ Retirement System, called the study “misleading” and questioned its value, arguing all the while that steps are being taken to head off the unthinkable.

“(The study’s findings) create unwarranted alarm among the public,” Rougeou said. “This type of academic analysis is not a true reflection of public pension solvency or actuarial soundness.”

Regardless of interpretation, the study, in concert with hordes of other reports and investigations, still points to some sobering trends that can’t be ignored.

To see which state departments and agencies are shouldering the largest portion of the UAL, click HERE.

2.) HOW DID WE GET HERE?

In 1992, the state reduced UAL payment amounts in the state’s two largest systems. As a result, the UAL debt increased even more. The dotted lines represent the total UAL balance before this decision was made. The solid lines represent the aftermath.

To answer this question thoroughly, we need to divert back to our lieutenant governor of note, Lether Frazar. His original incarnation of the Teachers’ Retirement System of Louisiana 76 years ago included everything a massive pension plan might need. Everything, that is, except money.

The legislation that created the teachers’ system in 1936 was unfunded, meaning the system never really had the cash needed to support retirement payments. But who needs money? Payments were made nonetheless, creating an instant UAL.

Two years later, a state police pension was established. Ten years later, state and school employees got their own pensions, too. And, staying on theme, they were all unfunded from the get-go.

By 1987, an initial UAL of $5.8 billion was evident and breathing down state government’s throat. Lawmakers passed and voters approved a constitutional amendment forcing all of Louisiana’s pension systems to be actuarially sound. To accomplish this, a 40-year amortization schedule was put on the books the following year and is constitutionally slated to be paid off by June 30, 2029.

But even that comes with a footnote. C.B. Forgotston, who served for seven years at chief counsel of the House Appropriations Committee , said there was no amortization schedule in the constitutional amendment. “It merely required that the UAL be paid off by 2029,” Forgotston said. “If the UAL had been amortized there would be no problem.”

Today, the systems for teachers and state employees still have balances due for that initial UAL. Meanwhile, all four systems have had a hand in the new UAL that came about in the wake of the 1988 amortization schedule. Add all of this up and you’ll get to that total figure of $18.5 billion revealed earlier in this story.

By the time 2029 rolls around, Louisiana should be ready to make its final payment, between $1.3 billion and $1.9 billion, to close out the initial, pre-1988 UAL. But it won’t end there. In 2030, the new UAL will still be around and require payments of $600 million to $700 million. There’s also no end date in sight, or rather there are only rough estimates that are bound to change based on future policy decisions.

While an unfunded approach helped give birth to the initial UAL, the new UAL is a touch more complicated. Based on findings by the Louisiana Legislative Auditor’s Office, here are the reasons why the UAL continued to grow even after lawmakers thought they had a solution in the late 1980s.

— The Amortization Schedule: In 1992, the state modified the payment schedules to reduce payment amounts and to increase the debt even more. These changes modestly reduced contribution requirements through 2009, only to cause it to be significantly larger in later years.

— Political Promises: While participation provisions for state employees and teachers have not changed dramatically since 1988, benefit accrual rates were substantially increased in 1993 and 2001. These additional benefits that were essentially “promised” by lawmakers to pension members increased the overall debt of the systems.

— Prediction Errors: The Legislature and individual systems employ financial overseers and planners known as actuaries. When they craft valuations, certain demographic assumptions have to be chosen over the years to predict turnover, salaries, the number of retirees, disabilities, deaths and other factors. In theory, if the actuarial assumptions are “reasonable” over the long term, gains and losses should cancel each other out. But that hasn’t been the case. Since 1995, losses have exceeded gains and increased the UAL. Forgotston, among others, are very skeptical about this particular attribute. “There are no errors in predictions,” he said. “They are intentional misrepresentations of the return on investment.  Anybody that has a CD knows their predictions are ridiculous. It is like putting lipstick on a pig.”

— Investment Losses: In an effort to make their assets grow, Louisiana’s retirement systems invest their holdings. As such, there is a certain amount of risk. For the state employees’ and teachers’ systems, no investment gains have occurred since 2007. Only net investment losses have been recorded, which in turn adds to the overall UAL balance.

— Cost of Living Adjustments: All four state retirement systems have mechanisms that provide for COLAs. In recent years when there were investment gains, half of the gains were credited to an experience account to pay COLAs — some critics liken this account to a slush fund. As a result, the full amount of investment gains were not available to fully offset investment losses from 2001 to 2003 and from 2008 to 2011.

As for a wild card, let’s not forget all of the special retirement bills that are passed by lawmakers each session. While these policy proposals are sometimes intended to apply to only one person, they very often open up huge loopholes. For an example, check out this special report from THE PELICAN POST regarding the state’s teacher retire-rehire laws.

For relevant blurbs from two recent news articles about the pitfalls of investment losses, click HERE.

 3.) HOW DOES THIS IMPACT ME?

If you don’t think Louisiana’s pension-related debt is becoming a serious problem, then you’re not paying attention. Employers are being required with greater frequency to kick more money into employee retirement plans. This means more taxpayer dollars are being used to pay for retiree benefits rather than vital services. ---Source: The Political Desk

This depends on who you are. But in all likelihood, there’s a sizable economic impact, and threat, especially if you’re a Louisiana taxpayer. That’s because employers are being asked with greater frequency to kick more money into retirement plans, a burden that is ultimately shouldered by taxpayers.

During the upcoming fiscal year, the employer contribution rates for the state police will be 68.1 percent. That’s an increase from 55.9 percent over the current fiscal year. Moreover, more than half of the new rate, or 41.4 percent, will be directed toward the system’s UAL. Schools will see their UAL contributions increase by an entire percentage point, while other state institutions are slated for an increase of 2.5 percentage points.

During the current fiscal year, more than $1.4 billion in taxpayer money will go toward paying down the UAL. To put this in perspective, the total state budget this fiscal year is $25 billion.

According to research conducted by Blueprint Louisiana, a good government group backed by businessmen and civic activists, the UAL is likewise affecting local school districts in a very significant way.

In 2010, a year that delivered absolutely no increases in state funding for education, Blueprint’s boosters contend that “school systems were required to spend $16 million less on classroom instruction to meet their retirement contribution obligations which now comprise one-quarter of school district spending on payroll.”

Additionally, superintendents cited layoffs and larger class sizes as examples of the immediate impact of increasing retirement costs, Blueprint found.

This theme isn’t confined to schools. The UAL is literally eating up tax dollars that could be spent elsewhere. More money for retirement can mean fewer police on the streets, for example.

Just consider the following conclusion offered up by Legislative Auditor Daryl G. Purpera: “On an annual basis for years to come, retirement costs will require a larger percentage of a shrinking state budget. Taxpayers can expect more dollars to fund the retirement of public employees, leaving less for higher education, health care and other state priorities.”

To take a gander at Blueprint’s overall agenda for pension reform, click HERE.

4.) WHAT IS BEING DONE ABOUT LOUISIANA’S UAL?

The systems for teachers and state employees have certainly received more attention in recent years. Then again, they account for the lion’s share of Louisiana’s UAL.

Last year, voters statewide approved a constitutional amendment that will eventually dedicate at least 10 percent of all non-recurring revenues during a fiscal year to the two systems in an effort to help them maintain healthier budgets.

Non-recurring revenues are basically unexpected monies that the state receives and doesn’t anticipate it will get again. Lawmakers also refer to non-recurring revenues as one-time monies or sometimes a surplus.

Mandating the use of non-recurring revenues to a certain purpose is not unprecedented, according to Barry Erwin, president of the Council for a Better Louisiana. For example, the state already uses such dollars to support the so-called “rainy day” fund and existing law already allows non-recurring revenues to be directed toward the UAL is lawmakers so wish.

“The liabilities in those systems are so huge and the increasing obligation of the state to reduce that debt is so significant that directing a minimum of 5 percent to 10 percent of non-recurring revenues to that purpose seems a reasonable and modest approach to addressing that problem,” Erwin said.

Former state Sen. Butch Gautreaux, D-Morgan City, one-time chairman of the Senate Retirement Committee and co-author of the amendment, said the money will trickle over to the systems rather slowly. Beginning July 1, 2015, 5 percent of all surpluses would be channeled into the UAL. In 2016, the threshold would be increased to 10 percent.

But it won’t be enough to make a sizable dent, compared to the overall UAL. That’s why Gautreaux, among others, believe that a strong political will, as opposed to a one-time constitutional amendment, is needed for the coming years. If lawmakers don’t start taking bolder steps, he added, the problem will only get worse.

“In my personal opinion, it’s never going to change,” Gautreaux said. “We’ll always have an unfunded accrued liability.”

Jeffrey D. Sadow, an associate professor of political science at Louisiana State University Shreveport, has come to a similar conclusion. In a recent blog post, he argued that lawmakers have already missed too many opportunities to act.

According to Sadow, state officials claimed the landmark constitutional amendment from the late 1980s that forced payoff of the UAL by 2029 meant there was no danger and that the rate of return was more than adequate to allay any concerns.

“But what they didn’t admit was the payoff scenario, as legislators have punted on opportunities to sequester money in good times to reduce the UAL, has become increasingly unsustainable,” Sadow said. “In 2008, only about two-thirds of the actual required payout was coming into the system, at that time leaving a $4.4 billion gap.”

For a better understanding of the leadership structures that guide Louisiana’s pension systems, click HERE.

5.) CAN LOUISIANA LEARN ANYTHING FROM OTHER STATES?

Josh McGee of the Arnold Foundation said the size of the public pension debt per household is overwhelming in many areas and the economic and social costs of this crisis are potentially crippling to Louisiana.

Based on datum prepared and analyzed by the Pew Center on the States, Louisiana has the ninth worst retirement liability in the nation in terms of unfunded portions. It ranks behind Connecticut, Hawaii, West Virginia, New Jersey, Kentucky, New Hampshire and Massachusetts.

So there’s certainly room for improvement.

Josh B. McGee, Ph.D, vice president of public accountability for the Arnold Foundation, a nonprofit think-tank based in Houston, said there are solutions that have worked in other states. In part, that’s because some are realizing that “failing to address the public pension crisis promptly would be economically catastrophic, triggering bankruptcies of cities, school systems and potentially even entire state governments.”

The states’ own estimates of the unfunded liability due to their pension benefit promises grew to $1.26 trillion in fiscal year 2009, up from $1 trillion just one year earlier, McGee said. However, using standard private sector accounting rules, the shortfall estimate increases to approximately $3 trillion, a sum that represents roughly one-fifth of the United States’ gross domestic product.

“In other words, the assets that states have set aside to pay for employee retirement benefits fall short of what they owe for those benefits by approximately $3 trillion,” he added.

Here are five potential solutions for Louisiana, as drafted by the Arnold Foundation.

— Defined Contribution: In a defined contribution plan, or DC plan, the employer  promises each employee a fixed percentage of salary. These contributions are placed in an account that is managed by the employee. The employee has the flexibility to choose her investment allocation and to make individual choices about the timing and structure of her retirement. The market risk of these choices is borne solely by the employee. Michigan has had a DC in place for state employees since the 1990s, and higher education and many private sector firms have used the DC structure successfully for decades.

— Cash Balance: Cash balance plans have features that are commonly associated with both defined benefit, or DB, and DC plans. A cash balance plan is a DB plan, but unlike the traditional DB plan, benefits are defined as a lump sum or “cash balance” in an employee’s account. Under a cash balance plan, much like in a DC plan, the employer promises a fixed percentage of salary and contributes that amount to an account for the employee. However, unlike a DC plan, the employee does not manage her account. Instead, the retirement system manages the funds for the employee and promises an average investment return. When an employee reaches retirement age, the employer may offer the employee an annuity based on the size of her retirement account and/or the ability to take all or a portion of the account as a lump sum. Nebraska and many private sector firms use the cash balance structure.

— Side-by-Side Hybrid: In a side-by-side hybrid, the sponsor maintains both a DB and DC plan and allows employees to choose between the plans. When implemented correctly, the sponsor institutes strict accounting controls to keep the problems created by the DB structure in check. Utah and Florida operate DB and DC systems side-by-side, allowing employees to choose between the two structures.

— Stacked Hybrid: In a stacked hybrid system, employees are offered a small DB, meant to provide a minimum amount of retirement security, with a DC stacked on top. The federal employee retirement system and the recently adopted reforms in Rhode Island use a stacked hybrid approach.

— Cap on Employer Contributions with Explicit Cost Sharing: This approach is agnostic about the specific plan structure and seeks only to eliminate cost uncertainty and provide a political incentive to keep future cost increases controlled. A proposed ballot initiative in California takes this approach. The proposed initiative caps employer cost at a specific percentage of earnings and specifies that the cost of all benefits will be divided equally between employee and employer.

If not one of these options, then what? Because of mounting UAL-related shortfalls, McGee said states, municipalities and school districts will soon be forced to take drastic measures to pay for their pension obligations.

For those who don’t think Louisiana’s UAL is impacting them, that means they soon will.

“(Governments) will pass the burden on to the public either in the form of increased taxes or, more realistically, cuts to services that are critical to society, such as education,” he warned. “Without significant changes to the current systems, public pension payments will quickly begin to crowd out other discretionary spending.”

To learn about other possible solutions and to see the latest in UAL news, visit the State Budget Solutions Project HERE.

Jeremy Alford is a freelance journalist based in Baton Rouge. You can reach him through his Web site at www.jeremyalford.com and follow his work at www.thepoliticaldesk.com. 

The single proposed constitutional amendment on Saturday’s ballot would prohibit the state and local governments from imposing a tax or fee on real estate transfers.

For a comprehensive description of the proposed amendment, we direct you to a report from the Public Affairs Research Council of Louisiana (PAR). PAR does not take a position, but their report describes the amendment, places the issue in context and summarizes the arguments for and against. It is well worth a few minutes of your time.

The central issue is whether it makes sense to amend the constitution to prohibit the state and local governments from accessing revenue from real estate transfer taxes.

Real estate industry groups are actively supporting the amendment. They argue that adding taxes or fees to the purchase and sale of land will act as a deterrent to these transactions. Government-imposed costs would discourage an important type of economic activity at a time when the real estate market is already in the doldrums. This is a compelling argument and it goes largely unchallenged by opponents of the amendment.

Instead, opponents claim that it would be a mistake to deny access to potential revenue streams at a time when the state and local governments are struggling with budget shortfalls. The Louisiana Budget Project opposes the amendment on these grounds. Similarly, the Council for a Better Louisiana opposes the amendment, though it focuses more on the advisability of amending the state constitution.

We believe that voters should support this amendment and vote Yes on Saturday. While there is no doubt that policymakers have been challenged by recent budget shortfalls, most taxpayers face challenges of their own. These taxpayers must live within their means and we believe that policymakers should do the same.

One underappreciated fact about budget deficits is that they force policymakers to address problems that are otherwise avoided. In times of surplus, it is easy to throw money at problems, avoid the tough choices and kick the can down the road. Policymakers are human and most humans are understandably inclined to prefer the easy way out.

But the tendency to avoid making tough decisions, left unchecked, leads to disaster. The requirement that our state balance its budget each year puts a check on this tendency, and balancing the budget when revenues are down is a healthy exercise that taxpayers should welcome even if policymakers do not. The substantive reforms that are needed in so many areas simply will not take place if policymakers know that there is always a new source of revenue around the corner.

Opponents of the amendment claim that governments need flexibility to deal with the challenges facing our state. We agree. But governments can demonstrate flexibility by finding creative ways to deliver better services at a lower cost, rather than finding new ways to separate taxpayers from their money. We encourage you to vote Yes on Constitutional Amendment 1 on Saturday. It will protect taxpayers, encourage economic activity and increase the likelihood of the meaningful reform in our state.

Crowding out of private business cited as reason for policy change

NEW ORLEANS, La. - Last week, the U.S. Department of Commerce nullified an $80.6 million grant meant to extend broadband internet access to rural Louisiana.

The Commerce Department rescinded the grant on the grounds that the Louisiana Board of Regents – who originally applied for and received the grant – had an implementation plan that was incomplete and behind schedule.

They also said that the board was unresponsive when repeatedly asked for additional information.

The grant, originally awarded last year through the American Recovery and Reinvestment Act, would have enhanced the state’s high-speed optical network at schools and libraries in 21 rural parishes and four American Indian reservations.

Upon learning of the Commerce Department’s ruling, Sen. Mary Landrieu (D) released a statement claiming that it was “yet another missed opportunity to improve the lives of Louisiana residents, particularly rural Louisianans who are often left out of such initiatives.”

Paul Rainwater, Commissioner of Administration, claims that the plan would undermine private businesses.

Projected Rural Broadband Internet Access from the American Recovery and Reinvestment Act

“From the start, we’ve always said there were implementation and sustainability problems in the grant that had to do with a top-down, government-heavy approach that would compete with and undermine, rather than partner with, the private sector and locals.”

Jim Harper, Director of Information Policy Studies for the Cato Institute, agrees with Rainwater, and says that subsidies and grants always distort market processes.

“Businesses are there to serve the demands of ordinary Louisianans, while grants tend to go to the politically well-connected.”

Jim Purcell, Board of Regents Commissioner of Higher Education, claims that he became aware of some problems with the plan soon after arriving in Louisiana, and attempted to remedy the situation, but “unfortunately, despite gaining demonstrated support from both our public and private partners, our approach was rejected.”

Both Landrieu and Purcell also say they’ll continue working to improve broadband access in the state despite losing the grant.

“If the state of Louisiana is unable to carry out these types of transformative projects across our state, then I will work even harder to partner with interested local officials, nonprofits and businesses to accomplish the same goals,” Landrieu says.

Harper contends that the best way to spread broadband to rural Louisiana is to lower taxes, leaving more money for Louisianans to spend on what they want.

He also suggests the federal government should release control of the electromagnetic spectrum so “more wireless broadband providers can come to the market and offer Louisianans more high quality broadband options at lower prices.”

Robert Ross is a policy analyst with the Pelican Institute for Public Policy. He can be contacted at rross@pelicaninstitute.org, and you can follow him on twitter.

Perennially failing model continues to consume tax dollars, government subsidies

The debate over reducing government subsidies to Amtrak intensified last week when House Transportation and Infrastructure Committee Chairman John Mica (R-Florida) labeled the railway a “Soviet-style monopoly.” While the severity of this statement may be questioned, it is a matter of fact that Amtrak continues to run at heavy losses for which the taxpayer is left holding the bill, strengthening the argument that it should be privatized or defunded altogether.

As revealed in a report by the Transportation Committee, the Sunset Limited line connecting New Orleans with Los Angeles operated at a loss of $417.92 per passenger in 2010. Overall, Amtrak’s 15 long-distance routes averaged a loss of $117.84 per passenger. Despite increasing ridership, Amtrak operated at a $506 million loss this past fiscal year, and expects a loss of $616 million next year.

Amtrak’s failings are easily attributable to its poor operating procedures, which Mica accurately terms as “antiquated.” These procedures include expensive ticket prices, extremely long travel times compounded by extended layovers, and limited days of operation- all of which entice potential passengers to use airlines instead. In addition, union friendly labor practices have raised costs considerably at the expense of progress.   

While this would ostensibly indicate a failing business model, Amtrak nonetheless has ardent supporters who contest that the private sector would not fare any better. Proponents such as Mayor Landrieu and Sen. Mary Landrieu argue that Amtrak is indispensable to the local economy because of New Orleans’ dependence on the tourism industry.

While transportation plays a pivotal role in shoring up local tourism, leaving transportation to the private sector seems logical at this point. No viable enterprise would hope to operate at a profit with the extremely inefficient procedures currently used by Amtrak. Furthermore, while a  privately-run line would be more efficient, many commuter rail lines may just simply not be responsive to the market. With the availability of planes, cars, and buses, passenger trains are no longer a practical option to many consumers.

Amtrak can afford to continue with such impractical operating rules because it is being paid for by someone else- taxpayers. Amtrak’s history has been one of consistent financial loss and government bailouts. The tired argument that it needs further subsidizing to be resuscitated is rendered null and void by the fact that Amtrak was dead on arrival.

Policies aimed at curbing recidivism have saved money while keeping crime rates historically low

Texas may have the reputation of being tough on crime, but the recent success of its policies proves that it is also smart and efficient. Marc Levin of the Center for Effective Justice, in conjunction with Right on Crime, explains how Texas has managed to reduce its incarceration rate while saving taxpayers hundreds of millions and reducing crime.

Since 2005, Texas has seen crime drop by double digit levels, the lowest since 1973, while adult incarceration has concurrently decreased by 9 percent. In the process, taxpayers have been relieved of shouldering over a billion dollars in taxes. This success has been predicated on two programs in particular.

In 2005, the state allocated $55 million to probation departments which would emphasize reducing recidivism from probation to prison by 10 percent. This was achieved by increasing monitoring of recent parolees, more consistent application of graduated sanctions, and greatly decreasing caseloads per parole officer to allow more attentive observation of subgroups such as mentally ill parolees. Overall, $119 million in tax dollars was saved.

The second program, initiated in 2007, was to appropriate $241 million towards alternatives to prison for low-level, non-violent offenders. Prior to this, the Texas Legislative Budget Board had recommended the state spend $2 billion on 17,332 new prison beds to accommodate prisoners. Instead, the state wisely invested in programs to help drug addicted and mentally ill prisoners, and in halfway houses for the recently released. By assisting in the rehabilitation of parolees, rather than anticipating their return to prison, the justice system has seen the number of revocations fall.

Texas’s criminal justice reforms have been so effective that in 2011, the state was able to close down the entire Sugar Land Central Unit prison. More measures are still on the way, though, including new bills which incentivize both local governments and prisoners to engage in degree programs and job training.

Louisiana is in dire need of implementing similar reforms. As has been widely reported, Louisiana has the highest incarceration rate in the nation, which is unacceptable and economically disastrous. The debate over constructing a new, larger prison complex in New Orleans illustrates the need to transform the local criminal justice paradigm. Texas is testament that preventing recidivism rather than expanding jail sizes saves both money and lives.

States need to curb liabilities and relieve taxpayers as defined benefit systems head towards insolvency

A new report by Scott Beaulier for the Mercatus Center at George Mason University illustrates the perilous finances of defined benefit public pension plans and their political and economic implications. The report suggests that defined contribution plans would help return pensions to solvency.

Currently, the majority of public pension plans throughout the country are defined benefit plans, which are woefully underfunded. At the end of the 2009 fiscal year, promised pensions to public employees exceeded existing trusts by a shocking $1.26 trillion. This represents a 26 percent increase since 2008, and this estimate is more conservative than many other recent estimates.

The evidence demonstrates that current trends in defined benefit plans are unsustainable. Whereas the ratio of public workers to retirees in 1970 was 5.3 to 1, it is now 4.5 to 1 and is estimated to be 2.1 to 1 in 2050. Unfortunately, politicians have been reluctant to encourage necessary reforms out of political expediency. As a result, state governments have resorted to measures like tax increases and benefit cuts to temporarily close the gap. Still, most are nothing more than pay-as-you-go schemes.

These policies are a recipe for economic stagnation and recession. States suffering from fragile economies face the specter of huge pension shortfalls, and governments want to avoid austerity measures. A transition to the defined contribution system, or a hybrid of it, is a sensible solution.

Defined contribution plans may not be perfect, but they are 100 percent funded. A defined contribution plan, like a 401(k), is one where the individual is guaranteed to receive the amount of his contributions, plus or minus market returns. As Beaulier explains, “a defined contribution system is one no longer supported by taxpayers, but, rather, by the responsible investment choices of individuals.”

Defined contributions also provide the employee with more flexibility in how to invest their money, empowering individual choice over where their pension money goes and protecting against external factors like inflation. As explained within the report, they function much like savings plans, whereas defined benefits offer no control to the individual.

The report points to the success found by Michigan, Georgia, and Utah in transitioning over to defined contribution systems, while also highlighting the dismal state of affairs in Illinois and Kentucky, which have largely resisted any substantial pension reforms. Though the transition incurs unavoidable costs, Beaulier presents compelling evidence that the change will be rewarded with solid economic health and a more sustainable pension system.

Cato Institute, National Review deride blueprint as another tax-and-spend plan

In his speech last Thursday, President Obama enunciated his tentative vision for a soon-to-be-revealed $447 billion job creation bill entitled the American Jobs Act. Most of the proposals fall in line with what one has come to expect from the Obama administration, namely spending paid for with targeted tax hikes on the highest bracket. New Orleans City Business provides a complete rundown of the policies alluded to in the President’s speech.

The tenets of this act have been met, not surprisingly, with ardent resistance by economic conservatives. Alan Reynolds of the Cato Institute equates Obama’s plan to a $447 billion tax hike on high income earners and businesses. Despite Obama’s assertion that these increases are meant to offset the temporary pay roll tax cuts, Reynolds notes that they actually subsidize 54% of the $447 billion price tag.

Reynolds also points to the valid concern that this new $447 billion act, putatively “paid for,” will threaten to exceed the debt ceiling which Congress arduously agreed to raise in July among hysteria of a government default. Reynolds may very well be correct in arguing that the President is dangling politically irresistible elements such as the temporary payroll tax cut and unemployment benefits to deflect attention from the overall tax burden and increased spending.

Likewise, Eric Stiles, on the National Review’s Corner, breaks down just how exactly the American Jobs Act will be paid for, and the unequivocal answer is with taxes. The vast majority of the money ($400 billion) will come from limiting itemized deductions, including charitable giving, on the $200,000 and above income bracket. The remaining money comes from a variety of taxes designed specifically with corporations and the wealthy in mind, notably the elimination of tax breaks for oil and gas companies. The administration rosily projects that “not a dime” will be added to the deficit, but this ridiculous promise is left to Congress to fulfill.

As Stiles and Reynolds explain, this latest proposal is nothing more than a repeat of past failed policies which seek to offset extravagant government spending by penalizing employers and industries. Temporary labor in “infrastructure” construction is no substitute for long-term, secure employment. The misleadingly named American Jobs Act is certain to face an uphill battle in Congress.

Jamison Beuerman is a contributing writer and policy analyst at the Pelican Institute for Public Policy. He can be contacted at jbeuerman@pelicaninstitute.org

Artistic endeavors should be supported on a voluntary basis

Over at The Lens, contributor Nathan C. Martin recently criticized the Louisiana legislature for cutting statewide funding for the arts. While Martin rightly celebrates Louisiana’s culture, his argument for increased government subsidies falls short. He claims that the budget cuts undermine the valuable asset that is our culture, but how can the legislature undermine something it has never been responsible for in the first place?

There are many reasons why Louisiana has “generations-old traditions like jazz, second lines, Mardi Gras Indians, zydeco and parade floats.” Our state’s unique history, geography and demographic diversity have all played a hand. If there is evidence that government support has been integral to any of these great traditions, Martin does not offer it.

If government funding were so vital to the existence of a rich local culture, wouldn’t other states have figured this out by now? According to this logic, Minnesota and Kansas need only spend a few more millions of dollars on the arts and they would become destinations for the educated young newcomers now heading to New Orleans.

Of course this is absurd. Just as New Orleans has its own culture, Minneapolis and Wichita have theirs. Each of these cultures has developed over many years and each appeals to some people but not others. State spending on the arts has never been a key factor in this process.

Some recognize that cultural traditions are created independently of government, but claim the state plays an important role in keeping these traditions alive. This, however, places too much faith in the government bureaucracies that deliver poor outcomes in so many other endeavors. To assume that taxpayer dollars are being used wisely just because they are dedicated to the arts is to ignore the rampant corruption and incompetence found in every other government realm. If the vitality of Louisiana culture depended on government support, we would all be in trouble.

The good news is that in a free society people voluntarily lend their support to the arts. This occurs in countless ways and has a track record of success that no government bureaucracy can match.

Preservation Hall, for example, was founded by individuals whose passion for traditional jazz spurred them to create a venue for the great musicians of New Orleans that had been fading into obscurity. Over the course of the past half-century it has grown into one of the most popular jazz venues in the world. Its owners have succeeded in preserving one of America’s great artistic achievements while turning a profit.

Another example is Frenchmen Street in New Orleans. This once-moribund area has become a world-renowned destination for visitors and locals seeking a range of music that cannot be found on Bourbon Street. Once again, individuals in the private sector found a way to make money while showcasing Louisiana artistry.

Undoubtedly there are worthy artistic projects that have benefited from state funding. But ultimately, the development of “new and innovative forms of expression” that Martin praises does not hinge upon government funding. The human instinct to create and consume art is too powerful to be extinguished by lack of state support.

When it comes to supporting the arts, government just needs to get the basics right: Keeping streets safe so artistic pioneers can revive blighted neighborhoods, removing unnecessary regulatory obstacles that might hinder enterprising investors in the arts, and ensuring that our children have access to a quality education so that they, too, will someday become participants and protectors of Louisiana’s rich cultural heritage.

Legislation would mandate legislative reauthorization of coordinated care networks

BATON ROUGE, La. – Two years ago, Governor Bobby Jindal announced a plan to alleviate the state’s Medicaid spending by transitioning to coordinate care networks. This week in the legislature, however, the House unanimously passed a binding resolution to end Jindal’s plan at the end of 2014, unless it receives legislative reauthorization.

These coordinated care plans, to be enacted this fiscal year (July 1^st), will transfer approximately two-thirds of Louisiana’s 1.2 million Medicaid recipients into managed care networks. The networks would be similar to an insurance model run by private companies which contract with the state and negotiate payments with providers.

Jindal’s proposal was an effort to lessen the strain of Louisiana’s health care spending while improving outcomes, especially in regards to Medicaid. As Kevin Mooney of the Pelican Post explains, the proposal would allow enrollees to choose their own plans and providers, in turn reducing Medicaid spending by increased competition. Additionally, the networks would emphasize preventive care which would help to decrease future outlays.

Nonetheless, Jindal’s proposal has faced stiff opposition from both ends of the spectrum. The libertarian Cato Institute criticized the plan for increasing eligibility to the entitlement program and not embracing a true free market based reform.

The state legislature is opposed on procedural grounds, arguing that Jindal bypassed the Legislature by inserting the program’s authorization into an amendment in state budget legislation.

Rep. Brett Geymann (R-Lake Charles) introduced the “sunset provision” when legislators balked at the idea of annulling the Jindal plan outright. Rep. Kay Katz (R-Monroe) commented that one committee should not have the power to discontinue a program of such importance. Nonetheless, lawmakers argued that it is necessary for the legislature to have oversight of a program affecting millions. Rep. John Bel Edwards (D-Amite) remarked, “The ramifications are too large… to not allow for the Legislature to have involvement.”

Jamison Beuerman is a contributing writer and policy analyst at the Pelican Institute for Public Policy. He can be reached via email at jbeuerman@pelicaninstitute.org or followed on twitter @jbeuerman.

Hyperbole flows as opponent accuses sponsor of hypocrisy

BATON ROUGE, La – Despite smooth sailing in the House, the National Debt Relief Amendment came to an abrupt halt this morning. Sen. Karen Peterson (D-New Orleans) came out aggressively against it, and without objection she had it deferred in its Senate committee hearing.

This late in the session, such a deferral essentially means the HCR 87 initiative is dead in Louisiana.

The resolution was for a state-initiated amendment to the U.S. Constitution, reading:

“An increase in the federal debt requires approval from a majority of the legislatures of the separate States.”

North Dakota State Senator Curtis Olafson (R-Edinburg) travelled all the way to Baton Rouge to testify in favor, and he cited the national debt problem as nonpartisan and in urgent need of address. He also called on legislators to consider the morality of imposing an ever-growing burden on future generations. (Click above to hear an excerpt from his presentation – four minutes.)

“I have a little two-year-old grandson. He hasn’t signed a mortgage. He hasn’t cast a vote – but our generation is sending his generation the debt for our spending today. We need to be paying as we go.”

Olafson noted favorable research from the Goldwater Institute (supported by the Pelican Institute) and the American Legislative Exchange Council’s adoption of it as model legislation. Finally, he sought to refute fears of a runaway amendments convention.

“Unless and until 38 states ratify a proposed amendment, the Constitution is untouched and nothing changes… An Article V runaway convention is a myth; a $14 trillion national debt is reality.”

His presentation, however, did not impress the Senate Committee on Governmental Affairs. Sen. Peterson lashed out at it as hypocrisy, since she believes Louisiana legislators pursue debt-enabled federal aid, and she proposed to rename it the “Hypocrisy Resolution.” (Click above to hear her exchange with Olafson and Rep. Noble Ellington – 8 minutes.)

Louisiana and Oklahoma are, in fact, the most federal aid dependent states in the nation, receiving half of their total revenue in that form. However, recent research suggests federal aid only worsens a state’s long-term fiscal outlook.

Further, 49 of the 50 states have balanced budget requirements; yet John Hood, president of the John Locke Foundation, a North Carolina policy institute, says that rather than cut spending when they can’t pay their bills, the states get the federal government to borrow on their behalf. Hood believes this is arguably a violation of their own constitutions.

HCR 87’s sponsor, Rep. Noble Ellington (R-Winnsboro), pointed out that receiving federal aid and endorsing ongoing deficit spending were two different issues, but his response fell on deaf ears. No members offered alternative debt-restraint strategies, beyond electing new federal representatives, but the final move for deferral went without objection.

Despite this setback, Olafson shall continue to promote the initiative. A Pennsylvania legislator has introduced it, and Olafson has a prime sponsor lined up in Michigan as well.

Fergus Hodgson is the capitol bureau reporter with the Pelican Institute for Public Policy and editor of The Pelican Post. He can be contacted at fhodgson@pelicaninstitute.org, and one can follow him on twitter.
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