Public Pensions Hadn’t Planned for This
The last thing a soon-to-retire worker wants to hear is that his retirement plan is in financial trouble. And the last thing taxpayers want to hear is that they have to make up for any losses.
Last week Missouri’s State Auditor found that, as of plan year 2015, the City of Bridgeton’s Employee Retirement Plan was only 67% funded and had unfunded liabilities of nearly $14 million. Bridgeton’s defined benefit (DB) plan was retired in 2012, but insufficient contributions from the city and lower-than-expected investment returns coincided with a lack of government oversight (the Finance Commission did not hold a single meeting from 2012–2014) to create the perfect storm. The plan’s current funding trajectory apparently leaves Bridgeton with two options: reduce payments to retirees, or put future taxpayers on the hook for the $14 million gap.
Mayor Terry Briggs spoke of the funding crisis, saying “If you were guaranteed that pension, you’re going to get that pension. We will have to scrape and come up with other means which may be . . . to contribute more money into it.…” Defined benefit (DB) plans typically guarantee monthly payments for life, so any financial risk falls upon taxpayers. In Bridgton’s case there may be no legal obligation to pay benefits if the plan’s funds are insufficient, but a recent local hotel tax increase indicates that Bridgeton policymakers acknowledge their obligation to retirees.
Bridgeton is not the only city that has been confronted with unfunded liabilities. The Pew Charitable Trusts has valued the shortfall between promised pension benefits and available funding at nearly 1 trillion dollars nationwide.
One alternative that avoids any possibility of incurring this funding gap is a defined contribution (DC) plan. In a DC plan—think 401(k)—benefits are not paid out indefinitely to retiring employees. Instead, contributions are invested during an employee’s career; upon retirement the funds are made available to the employee.
DC plans can protect municipalities and future taxpayers from devastating budget shortfalls, and protect retirees from the possible bankruptcy of municipalities. Bridgeton moved to a DC plan in 2012 to curtail the growth of its potential liability; other cities in Missouri should consider doing the same.