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.”

(7) comments

catspaw

Rick,

The only hole that exists in this topic is your obvious biased and purposely limited viewpoint based on your association with the neo-conservative Manhattan Institute.

First of all, your proposal does not solve the 4 billion dollar issue. Under your proposal, the unfunded liability is still owed to current retirees who are paying into the system. Your proposal also costs taxpayers more to counter out the balances of the unfunded liability without seeing a reduction in taxes to Montana citizens. Also, your suggesting that we should disassociate ourselves from the obilgations to those
who worked hard for their pensions? Second, Steve Bullock has already found a solution that will cure the problem over the next 7-8 years by proposing that all persons, both on the employer and employee side, increase contributions to the fund. Third, the states that you mention (Illinois, California, and New Jersey) are leading the nation in state debt due to poor GOP leadership and have no other options available in contrast
to Montana which has close to 500 million in surplus. Fourth, do you know why the defined contribution (and benefit) plans exist for public employees in Montana? It is no secret that public employees are paid 15-20% less than the private sector, and the "equalizer" is the public defined contribution/benefit pensions offered as part of employment. Do you propose a solution that involves elimination of defined benefit pension plans
also involving an increase of wages to market rate? The current proposal to increase public employee wages (5 percent this year and 5 percent in 2015, which still sits in Republican controlled committee) would still leave public employees 12% behind in 2015. Not to mention that those employees would lose more income to the new pension plan you propose. So you are in fact offering a WAGE DEDUCTION and your "solution" of moving
everyone to a 401K type plan does not fix this disparity either. Lets talk market wage increase before and making the current system sound before we state talking new pension system. Fifth, if your proposal of moving to 401K pension systems were implemented in our private sector with the same wage disparities currently seen in the public sector, do you think there would be retention and hiring difficulties in the private sector
as there are currently in the public?

Considering you lack of fact, obivious unfavorable sentiment against public employees, and lack of experience/knowledge in their pension systems. I would question your viewpoint and credentials regarding this topic.

MichaelS

wow catspaw, you must be a tap-dancer with the Department of Health and Enviromental Sciences, with a college degree in dance from the University of Moscow.

steeline

The Pension Fund for State employees is in need of repair. In order for a State Employee to have a retirement check at the end of their working life something has to happen. Time and people change and so does the economy. Now is the time to make adjustments to the "now". It goes for Social Security at the Federal level. Without a correction to the financial problems there won't be a retirement check for anyone in America. But do not dispare Obama has it figured out. There are 1 in 6 Americans on the government dole. That is how Obama got elected. Now that being said, Obamas' plan is to get 6 out of every 6 people dependent on the government, that way the democratic socialist party will have total control over your life from craddle to grave. You will be told you can't buy a soft drink in a container larger than 16 ozs. Sound good to you?

enu_22

The pension shortfall is a product of legislative willful neglect. Now, State workers will pay the price of those self-promoting, overfed, large-headed, cowardly windbags who should have been more diligent years earlier.

enu_22

If you think the legislature is doing a disservice with HB-13, wait until the GOP has their way with the pension system. They'll fix the Sate workers' wagon all right-they'll gut the system.

FlamingLiberal1

How exactly does the state of Montana have a surplus when this bill is not being paid? It's going to snowball on us if we don't fix it NOW. Let's stop with the talk of tax cuts until the pension system is actuarilly sound and the state workers get a long-overdue raise.

ralphy

The problems with the pension systems are not just a Helena problem. County workers state wide, teachers state wide, municipal workers state wide, law enforcement officers state wide are all impacted by how this problem is handled. Its seem like maybe the state hasn't been putting in its legally obligated share, hoping to pay it at a later time and then spending that money elsewhere...sounds like the social security lock box. Dreyfuss's proposal here is a good deal for everyone but the people doing the work and counting on the pension. Most of the handwringing being done here is by the people who don't want to pay at all.

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