Legislative Committees Ponder Solutions for State Retirement Funds

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Created on Wednesday, 20 June 2012 10:42

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Members of two legislative committees are pouring over pension reform proposals to vote on in the 2013 session.

Some of the suggestions are their own and some have been suggested by the state's two largest retirement systems.

But there's at least one wild card in the deck.

It's Gov. Brian Schweitzer.

A joint panel of the state Legislature's State Administration and Veterans Affairs and the Legislative Finance committees met, last week, to review some stark numbers on the state's nine pension systems. And, while there was an eight-hour discussion on how to change the programs, a couple of the lawmakers asked why the governor's proposal was not in the mix.

While Montana has assets of $7.6 billion in its pension system, as of June 30, 2011, it also has $3.9 billion in unfunded liability, according to the state Legislature pension information website.

The panel was told four of the eight plans administered by the Public Employee Retirement Board are actuarially sound, four are not. Another program, the Teachers' Retirement System, has a $1.8 billion unfunded liability.  The Montana Constitution requires public pension systems to be funded on an actuarially sound basis, which a state report noted has been a challenge since 2001 and the systems are now "significantly" underfunded.

In April, Schweitzer said he would propose legislation that would "fix" Montana's unfunded pension liabilities, saying it could be achieved without tax increases and give the system a surplus by 2021.

He proposed a "fix" for the TRS that involved $25 million from the state land guarantee account from natural resource development, a $14.7 million one-time only contribution from the employer and a 1 percent increased employee contribution and benefit change.

For the PERS, he proposed an $18.1 million state contribution and more local government contribution, a 1 percent increase employer and employee contribution.

Officials said the employee contributions would increase under the plan to 7.9 percent for the PERS and 8.15 percent for the TRS.

Schweitzer said he would use revenues to pay off liabilities and dip into record revenues from state lands raised through sales of natural resources such as coal, oil and timber sales.

On Tuesday, lawmakers were told the pension systems actuarially required contribution is about $116 million per year higher than the current level of contributions to the system and annual state and local spending is about $8 billion.

The website notes the unfunded liability is just under half of the annual spending in schools, state and local government budgets.

The panel was told the state would go to various agencies to fund the actuarial required contributions. That would include $33 million from state agencies, $26 million from local governments and community colleges, $45 million from school districts and $12 million from the Montana University System.

Sheryl Wood, associate director of the Montana Association of Counties, said her members felt they were being held accountable for something they did not control. She said counties pay into the pension system but yet can only comment during the legislative session. She said the boards should be structured to make room for all contributors.

Alec Hansen, executive director of the League of Montana Cities and Towns, told the panel his organization was prepared to deal with a reasonable solution.

"This thing has to be turned around," he said. "I agree with that 100 percent." But he added Montana's cities and towns don't have the money to make it happen on their end of the deal.

Lawmakers, also, discussed if proposed changes could withstand legal challenges, as both the state and U.S. Constitutions prohibit impairment of contracts, but allow changes to existing contracts.

Bob Williams, president of State Budget Solutions, told Montana Watchdog the situation will worsen unless Montana officials impose drastic reform. His organization estimates Montana's pension debt at $8.8 billion. Williams said SBS used market-based accounting rather than government accounting, which assumes artificial rates of return.

"Montana pension funds have fallen and they can never get back up," he stated. "Whether workers and taxpayers take a relatively small hit now or a huge hit in the future is the only policy question your state faces."

He said the best-case scenario right now is that without major reform the unfunded pension liability will cost the average Montana household $826 in additional taxes every year for 30 years, according to a study for the National Bureau of Economic Research. That is on top of all current taxes, future tax hikes and any state revenue increases from economic growth.

Williams said that in four years Montana pension fund managers lost almost 20 percent in value even as pension obligations increased almost 21 percent.

And, for every dollar public employees contributed, they lost $1.56. They paid out $1.2 billion more than they took in from earnings and contributions, Williams said.

SBS describes itself as a non-partisan organization that offers information about coming fiscal and economic disasters and reforms to avoid them.

David Senn, executive director of the TRS, offered the joint panel a plan that he said proposed incremental solutions that would take several years to solve. He warned that if no changes were made that TRS would run out of money by 2055.

Suggestions included increasing the employee, employer and state contribution rates, end 25-year retirement at any age, raising retirement age to 65 and suspending or reducing cost-of-living adjustments.

Some of the discussion centered on continuing with the defined contribution plan or switching to a defined contribution plan, which transfers the financial and accruing actuarial risk  to employees. Under the defined benefit plan, the employer guarantees the benefits and assumes the risk, according to a state report.

As the panel reviewed proposed changes to the pension system, Sen. David Wanzenried, D-Missoula, asked why the governor's proposal was not on the agenda.

Amy Carlson, legislative fiscal analyst and director, said the governor's proposal was discussed at a previous meeting and Tuesday's meeting was to concentrate on PERS and TRS.

However, Sen. Carol Williams, D-Missoula, said toward the end of the meeting it would be good for a subcommittee to meet with the governor and get more details. She said the governor's proposal was one piece of the puzzle.

A representative of the state's largest public employees union, the MEA-MFT, urged the board to "look carefully at the governor's plan." And she said the union encouraged lawmakers to stick with a defined benefit plan instead of defined contribution.

"Defined contribution concerns us all," Diane Fladmo, director of research and bargaining for MEA-MFT, said, adding the union did not think it was a solution to the problem.

She the union wanted to protect defined benefit pensions.

"We are willing to share the burden," she said.

Senate President Jim Peterson, R-Buffalo, in a news conference Monday outlining the goals of what he expected to be a Legislature with a GOP majority in 2013, said pensions would "be a big issue" in the upcoming session.

"There's a lot of things we can tweak and get out of our liability over time," he said.

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