Public pensions presented one of the biggest and most complicated problems the 2013 Legislature tackled.
Lawmakers and Gov. Steve Bullock approached the challenge the right way: An interim committee composed of equal numbers of Democrats and Republicans gathered a lot of information for decision makers. Lawmakers, local governments, state workers and retirees worked on bills. Legislative leadership appointed a select committee on pensions early in the session. Bullock made his position clear with support of specific pension bills, which he signed into law Monday.
The pension bills that the Legislature and Bullock agreed on contain elements necessary for eliminating the unfunded liability. Montana public employees will have to increase their pension contributions. Employers (that means the state, counties, cities and school districts) will be required to increase their pension contributions.
The state will transfer $128 million in cash into public pension funds over the next two years. About $14 million will be transferred from school district retirement funds to the Teachers Retirement System. Future employees still will be part of the defined-benefit system, but they will have to work longer and pay more for their benefits.
A pension fix is imperative because the state of Montana has a constitutional obligation to fund public pensions to make them actuarially sound. Most of the state’s pension programs have unfunded liabilities that would total $4.3 billion over the next 30 years. That is an obligation the state must pay.
Actuarial analysis shows the teachers retirement fund covering its presently unfunded liability in 22 years under the new pension law. Previously, it was projected to never amortize. The Public Employees Retirement System did not amortize its unfunded liability under previous law; the fiscal note with the Public Employees Retirement System bill says it will amortize in 15 years.
Progress has been made. But will the new laws really resolve the unfunded-liability problem?
There are two major hurdles for the pension fix of 2013. First, the legislation was amended from the original version Bullock endorsed and a reduction in retirees’ annual cost of living adjustment was added. The new law immediately slices the Guaranteed Annual Benefit Adjustment from 3 percent to 1.5 percent.
The Legislature’s own attorneys cautioned lawmakers that the GABA cut is likely to be illegal. A lawsuit is expected, perhaps as early as this week, in an attempt to invalidate that part of the new law before it takes effect on July 1.
The GABA cut would leave state retirees with less income than they bargained for. But without the benefit cut, closing the pension funds’ deficits would take more time.
Second, the pension analysis assumes an average annual return of 7.75 percent.
According to information provided to lawmakers, none of the state pension funds have a return that high over the long term. Since inception in 1994, the net rates of return for the pensions ranged from 7.04 percent to 7.45 percent as of Feb. 28.
Time will tell if Montana’s public pensions were fixed this year or if further action will be needed next session.