Editor’s note: This is the last of a series previewing the major issues for the 2013 Montana Legislature, which convenes Monday in Helena.
HELENA — One of the thorniest issues facing legislators this winter will be how to improve the finances of state public employee pensions and whether to change how the systems are structured.
Spurring the discussion is the fact that state pension funds face a potential shortfall topping $4 billion over the next 30 years.
Some solutions call for pumping surplus state cash or coal tax trust fund money into some pensions systems. Others propose increasing how much public employers contribute to the funds per employee, while others also would require workers to boost their own contributions.
Outgoing Gov. Brian Schweitzer, a Democrat, has called for increasing the pension contributions from both public employers and public employees by an additional 1 percent of their salary. The plan also calls for spending $30 million a year in revenue from natural resource development over the next two years and require local governments to contribute more, too.
Other proposals seek to revamp certain pension plans for employees. They would require new employees to be part of something more like a 401(k) system and dropping the current defined-benefits system that guarantees retirees a fixed monthly pension based on how long they worked and their average of top annual salaries.
Legislative leaders are talking about forming a select House-Senate committee to work on the pension issue.
Incoming House Speaker Mark Blasdel, R-Somers, said he and incoming Senate President Jeff Essmann, R-Billings, talked to Democratic Gov.-elect Steve Bullock about the possibility of forming a select committee to work on the issue. It would include members of the Joint Appropriations Subcommittee on Long Range Planning and some members from the House and Senate State Administration committees.
“It isn’t an issue just the Republican Legislature can fix by itself,” Blasdel said. “We have to have buy-in from the governor’s office. It would be a shame to spend 90 days on a fix that the governor is not willing to sign. It’s got to be something that’s a workable solution for both sides.”
Bullock believes “that shoring up our pensions will strengthen our already-solid fiscal position and make Montana an even better place to do business,” spokesman Kevin O’Brien said.
“The governor-elect has told legislative leaders that he’ll be an active partner in crafting solutions, but he also told them that it’s imperative to understand the scope of the problem — and ensure that we don’t manufacture hysteria and leverage a solution on the backs of snowplow drivers, teachers and other middle-class families.”
Incoming Senate Minority Leader Jon Sesso, D-Butte, supports the idea of a joint select committee to tackle the pension issue.
“It gives us a chance to match up the fiscal impacts with the policy impacts a little better than if we put all the policy impacts in State Administration in the Senate and House sides,” Sesso said. “You get to a point where folks are dreaming up solutions that are fiscally unsound. On the other side of the coin, if you leave the finance guys in the room without the policy guys, they conceptualize solutions that work fiscally and don’t work policy-wise.”
As of July 1, six of the seven state pension funds face unfunded liabilities, or potential deficits, totaling $4.24 billion, as they haven’t recovered from the battering their investments absorbed during the 2008-2009 recession.
These shortfalls occur when actuarial estimates of what contributions are needed now to pay future benefits come up short, according to the Legislative Services Division.
Some funds — those for highway patrol officers, municipal police, firefighters and judges — are in better shape than others.
The Montana Constitution requires state public retirement systems to be funded on an “actuarially sound” basis. State law defines “actuarially sound” to mean that contributions to each plan must be sufficient to amortize unfunded liabilities in no more than 30 years.
However, four of the seven funds — those for teachers, public employees, sheriffs and game wardens and peace officers — don’t amortize over 30 years, which is considered best practice under accounting standards,
The Legislature’s State Administration and Veterans’ Affairs Interim Committee, evenly split by political party, studied the pension issues for nearly 18 months. In the end, panel members voted to remain neutral on 23 proposals addressing the pension systems because of time considerations and political constraints.
A analysis done for the committee found the Legislature would have to appropriate $112 million each year over 30 years for the systems to amortize unfunded liabilities over 30 years to hold participating employees harmless. It would take $84 million annually for the systems to amortize over 40 years. That would be money that couldn’t be spent for other purposes, such as increasing funding for education, health care or pay raises or that could fund tax reductions.
The Pew Center for the States in November said Montana faces a troubling situation with its public employee pensions, with shortfalls then totaling $3.9 billion, or the equivalent of $9,700 per household. A number of other states are in the same fix.
The Pew Center study found that Montana’s pension funds were fully funded, with a surplus, in 2000.
Then came a combination of benefit increases that weren’t paid for when offered and retirement fund losses after the 2001 recession that created a funding gap of $1.3 billion. After the recession in 2008, the state’s pension deficit skyrocketed to $3.9 billion
The Teachers’ Retirement had the largest unfunded liability, or potential deficit, with $1.96 billion, while the Public Employees’ Retirement System’s defined benefit system was next at $1.8 billion.
Of the seven state pensions, only the judges’ retirement system doesn’t have an unfunded liability.
Since a special legislative session in 2005, lawmakers, at the urging of Schweitzer, have dumped $150 million into the Teachers’ Retirement System and $25 million in the Public Employees’ Retirement System. Legislators rejected a plan by Schweitzer in 2009 to drop $43 million in federal stimulus money into the TRS fund, spending the money instead on local projects.
Part of the problem has been that investment returns on the pension funds have averaged about 2.2 percent over the past decade, while the actuarial assumptions are based on the investments producing 7.75 percent.