Editor's note: This is the final part of an ongoing series this month by the State Bureau, examining major issues before the 2011 Legislature, which convenes Jan. 3.
HELENA — Members of the 2011 Legislature will be asked to approve a pay increase agreed to by the Schweitzer administration and three major unions, to consider capping state employees' pay and benefits and to make some adjustments in state pension plans.
Gov. Brian Schweitzer's administration reached a tentative agreement with public employee unions to provide a 1 percent pay boost in January 2012 and a 3 percent increase in January 2013.
The three major public employee unions already have voted to ratify the agreement, which must be approved by the Legislature to take effect.
Rep. Cynthia Hiner, D-Deer Lodge, is sponsoring Schweitzer's proposed pay plan, which calls for a 1 percent pay increase in January 2012 and a 3 percent raise in January 2013.
Its estimated cost for the two-year period is $21.6 million from all funds, including $11.4 million from the general fund, said David Ewer, Schweitzer's budget director.
The 2009 Legislature froze pay for many state employees, but gave a taxable, one-time $450 bonus to state workers whose annual salaries were $45,000 or less.
This pay plan has been overshadowed at times by a proposal by Sen. Dave Lewis, R-Helena, to cap state employees' pay at twice the mean household income in Montana, plus benefits. He wants to put the measure on the ballot as a referendum and bypass Schweitzer, who has criticized the idea.
Lewis said the mean household income in Montana is about $43,000, with benefits equal to about 30 percent, bringing the total to $56,000. Multiplied by two, the pay and benefits cap would be $113,000.
"Public employees can't be the highest people on the salary chain," Lewis said, noting that officials in some other states are targeting state employees' salaries.
As he campaigned door-to-door, Lewis said, many state government workers told him that they were upset over the kinds of raises being given to the hierarchies in the bureaucracies, particularly in such departments as Transportation, Public Health and Human Services and Labor and Industry, which receive much of their budgets from federal money.
"There's a lot of resentment among the rank-and-file toward the broadband pay plan," he said, referring to a plan that gives directors more flexibility in giving raises. "It's basically the director's posse that gets the big money."
Lewis said his bill would cover only the executive branch. He can't legally impose the cap on employees of the judicial branch and university system.
Both the governor and the executive director of the Legislative Council could make pay exceptions for purposes of recruitment and retention of employees, Lewis said.
"If it's approved by voters, it would be a major policy issue," he said.
"Then they would have one year to review all the people who make over the limit. Unless there is an exception for retention, salaries would have to be rolled back."
He said he assumes there will be exceptions for some scientists, doctors, psychiatrists and some information technology specialists.
Eric Feaver, president of the MEA-MFT union, blasted Lewis' idea as "stupid" and "crazy."
"I just can't imagine why a legislator, effectively from Helena, would attack the economic viability of this community," Feaver said, referring to Lewis, whose Senate district stretches from Ryegate to Deer Lodge and includes part of Lewis and Clark County. "I'm convinced once the government decides to freeze salaries, it won't stop at with the high end."
Feaver said that, of the 12,000 executive branch employees, only 300, or 2.5 percent, make $80,000 a year or more. Of the 12,000 executive branch employees, Feaver said, their average salary is $42,600.
"He lives here in town," Feaver said.
"He was a long-term state bureaucrat who had very responsible, good-paying jobs. He retired on an excellent benefit package. Apparently, he doesn't want the next generation to enjoy what he has."
Rep. Wayne Stahl. R-Saco, said he has a bill to study the broadband pay scale and see where the biggest raises have gone. Like Lewis, he said he hears that they have gone primarily to directors' top aides.
Retirement systems for state and local government employees and teachers are expected to be a major topic of debate in Montana in the 2011 session, just as in other states.
Rep. Brian Hoven, R-Great Falls, has proposed that the state switch to a "defined contribution" system for all new state employees hired as of 2012. This would resemble the 401(k) systems used by many private employers in which both employers and employees contribute to a fund that is managed by individual employees for their use when they retire. Returns would vary widely depending on the individuals' investment decisions, with these plans not guaranteeing a fixed monthly benefit when people retire.
State and local government employees and teachers now have what are called "defined benefit" plans in which retirees are guaranteed a fixed, certain monthly pension based on their years of employment and the average of their highest three years of salary. These pensions are guaranteed, regardless of how the state investments backing them up have performed.
Hoven could not be reached for comment.
However, advocates of switching to defined contribution pension plans point to the underfunding of defined benefit plans, particularly in light of the stock market crash in late 2008 and 2009 when pension fund investments typically lost more than 20 percent of their market value.
Montana Teachers' Retirement System and Public Employees' Retirement System had unfunded actuarial liabilities — or projected shortfalls — of $1.56 billion and $1.35 billion, respectively, as of June 30, 2010. Neither would amortize over 30 years, which is required of pension plans that are deemed actuarially sound.
After an interim study, a legislative committee proposed two bills to change the Teachers' Retirement System.
Republican Sen. Joe Balyeat, a certified public accountant from Bozeman, said one bill would switch newly hired teachers to a hybrid plan, "which is not a full defined contribution benefit or a full defined benefit plan."
"Each employee has their own account," he said. "When they retire, they basically get the benefit of what's in their account, plus a 100 percent match from the state government."
The money would be invested by the Board of Investments, not the individual employee, but it would provide a guaranteed annual return, with the TRS board pegging the interest rate at between 5 percent and 9 percent, Balyeat said.
"The advantage of this approach is that it closes most of the loopholes that people have used to game the system — like spiking their income late, getting a lot of years of service at a low salary or hourly work and then, in the last three years, arranging for their income to go way up," Balyeat said.
His bill also would provide an extra financial incentive for teachers to continue working until they put in 30 years of service. They now can retire after 25 years.
The other major bill, by Sen. Larry Jent, a Bozeman lawyer, would set up a professional retirement option for new hires in TRS.
Those working 30 or more years would receive a 2 percent multiplier for all years of service, while those working less would continue to receive the current 1.667 percent, according to a legislative report. The multiplier is a key figure in calculating pensions.
If teachers now retire at 25 years, Jent said, it can cause "a big problem." If teachers retire then, they may have low retirement benefits, which provides them with an incentive to move to Idaho, Wyoming or Alaska and teach there.
"That's a huge talent drain and a financial drain," he said. "The money starts going out."
If teachers taught longer, he said, they would pay into TRS longer and draw their retirement benefits for a shorter time.
"This seemed like something that is doable that has the basic goal of actuarial soundness and the goal of retaining teachers," Jent said.