Pension Fund Deficit

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There are no simple fixes to the public employee pension systems.  Two out of 8 of these plans now show an unfunded liability of 1.46 billion during the next 30 years.  Other plans may also become actuarially unsound in the future if major policy changes are not implemented in the next session.  


Montana's pension problems didn't start in 2001. Ever since these plans were
created in 1937, lobby groups for government employees have always pressured the
Legislature to increase benefits. Past Legislatures have increased monthly
payments, shortened years of service, increased medical benefits, and also
implemented early retirement benefits, while not requiring increased
employer and employee contributions in return. But because Article II, Section 31 of our state constitution prohibits the Legislature from breaking or impairing contracts made in the past, there can be no increase in employee contributions or decrease in benefits in order to make up the shortfall left by past agreements. Montana may address the shortfall by using so-called "surplus state general funds" or by placing the entire burden on employers -- our local and state government agencies. The agencies in turn can either absorb these costs in their budgets, or as is more likely, pass them straight through to the taxpayer through increased commercial and residential property taxes.


The root cause of the problem with our government pension system is the
misuse of the phrase "surplus money." The ending fund balance in the state
general fund is not really a surplus, but is better described as leftover
taxpayer money after the state budget set by the previous Legislature has
been funded. It is better thought of as a reserve, a cushion held back in
case of unforeseen emergencies with the hope it can be refunded to taxpayers.
These funds are "one-time" dollars which should never be used to expand government.


The pension dilemma was created by the same sort of faulty thinking. Pension
funds are invested in stocks and bonds in order to both reduce risk and earn
a good return of about 8% a year, which is figured into the 30-year
actuarial calculations for paying out future benefits in existing pension
plans.  When the economy thrives, the cushion increases. When it tanks, the cushion
decreases. During the 1990's, we had years of 12 to 19 percent returns,
which gave the false impression that increased benefits could be funded
without increasing employee and employer contributions, something that in
hindsight should have been, and should today be, against the law.
The legislative fiscal notes attached to these benefit-increase bills showed
no impact on the state general fund and federal funds. The impact was, you
guessed it, on the so-called "surplus" money in the pension plans. Had the
"surplus" not been drawn down by the new benefits, there would now be no
unfunded liability in the pension plans.



The State Administration and Veterans’ Affairs Interim Committee has developed a bill (LC2005-3) which revises the fiscal note procedures and solves other policy problems with retirement systems.  Although I appreciated working on this committee and voted to draft the bill for use in the next session, I will not support the fiscal part of the bill which raises the employer’s share of the contributions by about 30%.  A tax of this magnitude will cause irreparable damage to home owners and businesses.


I am working with other Republican legislators on alternatives such as using money out of the Coal Trust Fund (720 million balance), contributions out of the ending fund balance each year and bonding to secure the funds needed.


An idea that has merit is to put the $125 million “one time money” promoted by the Governor into the fund and sell about $625 million worth of bonds.  These bonds could be sold with an interest rate of about 4% depending on the market.  This $750 million cash infusion positions the pension fund to continue its historical average performance (8% return) and restores the cushion needed to mitigate future market fluctuations.  For example, the rate of return for PERS, the largest pension fund, for 2004 was 13.4%.  If the $750 million had been in the fund, about $100 million would be available (60 million for the fund and 40 million for the cushion or to retire bonds).   Hopefully, all of the bonds issued now will be retired much sooner than 30 years and we will have our cushion back which must never again be called a “surplus!”


Representative Verdell Jackson

House District 6 & member of the State Administration Interim Committee