HELENA — Montana’s pension plans are on an “unsustainable course,” and current contribution policies will never pay off their combined $4.3 billion in shortfalls, a researcher from the Pew Center on the States told legislators Tuesday.
David Draine, Pew’s lead researcher on public pensions and retiree health care plans, told three legislative committees that Montana has failed to set aside enough money to fund the pension promises it has made. As of 2012, its pension systems collectively were only 64 percent funded. He was speaking at the invitation of the Legislature.
“If not addressed, Montana’s growing pension debt of $4.3 billion will threaten public workers’ salaries and benefits and will crowd out essential state services,” Draine said.
The $4.3 billion in debt amounts to half of the state’s annual budget spending for all government services. To pay it off immediately would be the equivalent of every Montana household contributing $10,600 to the systems, Draine said.
More than 90 percent of all public workers in Montana belong to the Public Employees’ Retirement System or the Teachers’ Retirement System, he said.
“Alarmingly, our actuarial analysis of PERS and TRS reveals that, under current plan assumptions, the state’s largest plans will run out of money without a change in either contribution policy or plan benefits – in 2041 for the teachers’ plan and by 2048 for the state employees’ plan,” he said.
Gary Buchanan, co-owner of a Billings investment firm and the former chairman and current member of the state Board of Investments, also addressed the committees.
“Pension shortfalls should be direct reductions against any surplus,” he said. “They’re obligations. Pension shortfalls should be dealt with as part of the executive budget.”
He said “smart states” such a New York and Wisconsin paid their annual required contribution (ARC) every year before their funding shortfalls veered out of control.
“A real solution gores everyone’s ox,” Buchanan said.
Among Buchanan’s solutions were: higher contributions from employees, a more reasonable (and lower) cost of living allowance for retirees, increased “anti-spiking” measure to stop large pay hikes for employees in their final years of work to enhance their pension benefits.
Buchanan called “totally unrealistic” the state’s actuarial assumption that pension funds will realize investment returns averaging 7.75 percent annually.
“They don’t think it’s remotely possible,” Buchanan said of investment experts. “When you tell an investment board thou shall make 7.75 percent, you increase your risks.”
Draine, meanwhile, said for Montana to offer a traditional defined-benefit pension plan in a sustainable way “requires consistent, ongoing funding discipline, not a lucky roll of the dice.”
Montana’s defined-benefit pension plans provide retired public workers with a guaranteed monthly pension, regardless of how the pension investments perform. The pension is based on a formula of how many years employees worked and the average of their highest three years of salary.
State pensions went from a total surplus of $244 million in 2000 to a $4.3 billion deficit in 2012 because Montana repeatedly increased pension benefits without paying for them and failed to require public employees make adequate contributions, Draine said.
He recommended that Montana develop a plan to responsibly pay down the unfunded liability over a reasonable time and adopt a reformed pension system that is “affordable, sustainable and secure.”
Its features should include an unwavering commitment to full funding, Draine said, and savings and benefit accrual rates that provide a reasonable benefit to all workers, regardless of tenure. The investments should be pooled and professionally managed with low fees, he said, and can be converted easily to annuities at reasonable rates.
“These features can and should be included in any retirement plan offered by the state whether it is a traditional defined benefit, a 401(k)-style defined contribution plan or another structure like a stacked hybrid or cash balance plan,” Draine said.
“There is no one-size-fits-all solution,” he said. “Every state has a unique set of policy preferences political dynamics and budgetary challenges.”
The Montana Public Pension Coalition comprises five unions: American Federation of State, County and Municipal Employees, MEA-MFT, Service Employees Industrial Union, AFL-CIO and Montana State Council of Professional Firefighters.
“As Pew continues to advocate for public pension overhaul in Montana, it is critical that all parties are aware of how disastrous Pew’s proposals would be for Montana’s taxpayers and public workers,” said the statement, citing a report by a group in Kentucky. “Hopefully, Montana’s legislators will pay attention to the serious costs and risks associated with Pew’s plan and will not be played the fools.”
This story was corrected to reflect the membership of the Montana Public Pension Coalition.