The Big Sky State’s pension plan has a big hole in it.
A recent Pew Center for the States study shows that overall, Montana has made just 81 percent of its actuarially recommended contributions to the Public Employees’ Retirement System (PERS) and Teachers’ Retirement System (TRS).
If you think that falling short by 19 percent is not too bad, you’re not thinking long term. Over time, the size of the combined shortfall has compounded and is now approximately $4 billion. This equates to roughly two-thirds of the amount necessary to pay for the retirement promises made to Montana’s public employees.
While that’s bad, the real shortfall is probably much larger. The $4 billion figure assumes an unduly optimistic annual investment return of 7.75 percent. There is no easy cure for this disease. But left untreated, it only gets worse.
Need proof? Look at Illinois, New Jersey and California, where chronic pension underfunding has precipitated drastic changes to the terms of employment for public workers. Successful reforms in Montana will require a combination of plan design and funding reforms. This will need to be a priority for all concerned.
Absent reform, eventually these plans will be unable to fulfill obligations to retired state and local employees.
Any reform proposals should begin by moving new hires into defined contribution, or 401(k)-type, plans. Ideally, these plans would cost taxpayers 4 percent to 7 percent of payroll and be invested over a plan participant’s entire career in a diversified portfolio such as a target-date fund.
These plans, which are the norm in the private sector, transfer investment risk from the taxpayers to the beneficiaries.
Also, Helena must begin to make contributions to these pension plans that align with what the state’s actuaries recommend. Policymakers frequently avoid making the actuarially recommended contributions because there are few if any immediate consequences for not doing so. But this is unfair to future generations of Montana taxpayers, who will be asked to bear the burden of these unfunded liabilities. But should future taxpayers be asked to clean up the mess made by today’s policymakers?
The goal should be to fund benefits as they are earned. As an upside, doing so eliminates the need to come up with the necessary monies through budget cuts or higher taxes.
Some reform proposals have suggested amortizing pension costs over longer and longer periods of time. However, this is not likely to solve the problem, as the average remaining career of a current employee is likely in the range of 15 years. The Montana Constitution requires public pension systems to be funded on an actuarially sound basis over no more than 30 years.
Naturally, some public employees will reject these reforms, claiming they will place participants at the mercy of a volatile stock market. They’re not entirely wrong — there will be a transfer of risk.
Montana needs pension reform, or Big Sky taxpayers will be asked to fill that big hole.
Rick Dreyfuss is a senior fellow at the Manhattan Institute. He has more than two decades of private-sector actuarial experience with the Hersey Co. and is the author of a new report “Fixing The Public Sector Pension Problem: The (True) Path To Long-Term Reform.”