Recently on this blog, my colleague Mike McShane highlighted a fascinating post from Chad Aldeman of Bellwether Education Partners. Using data that include state and local contributions to pension plans and state spending on higher education, he computes which states are currently spending more on public employee retirement contributions than they are on colleges and universities. Missouri is one of ten states where retirement contributions surpass higher education spending.
Some may look at this not as an indictment of our pension plans, but on how “little” we spend on higher education. Indeed, a few months ago, I sat in a meeting trying to figure out how the College of Education at the University of Missouri–St. Louis could cut costs. As the St. Louis Post-Dispatch has reported, the university is facing a serious budget crunch. While I examined the figures with a group of colleagues, one professor suggested that the real problem was declining state aid for higher education.
But let’s say we want to spend more on higher education. Where does that money come from? It doesn’t get created out of thin air. Given Missouri’s anemic economic growth, the available pie of state funds isn’t getting any larger. Any new funds for education will likely come either from another program or from taxpayers. The same can be said of rising pension costs. As we spend more on pensions, we will either have to cut back on funding to higher education and other services or we will have to take more from taxpayers. There is no magic third option; someone has to pay the piper.
Using standard actuarial valuation, Missouri plans are, on average, 78 percent funded and unfunded liabilities are slightly below $17 billion. Using a fair market approach, funding ratios lie between 41 and 52 percent and unfunded liabilities total from $57 to $89 billion.
In other words, our current obligations far surpass how much we have set aside in pension funds.
Unless Missouri changes how we structure our pension systems, we can expect our obligations to pension funds to grow. This will continue to put pressure on the state budget and will continue to divert spending from other government programs, such as higher education.