Missouri’s Pension System Must Change

Posted on by James V. Shuls

When it comes to state pensions in Missouri and bad news, the hits just keep on coming.

Last week, Bellwether Education Partners reported that Missouri is one of only 10 states currently spending more on public employee retirement programs than on higher education. You read that right. We spend more on pensions for public employees than we do for all of our state’s public colleges and universities.

Just a few days later, the St. Louis Post-Dispatch reported that the state treasurer was revising downward the expected rates of return for the money in the state’s pensions systems to adjust to slower growth in the stock market. This means the funds themselves are even more underfunded than we thought and may need huge infusions of tax dollars to meet their obligations to the state’s workers.

Add this news to what we already know about pensions, and the full, dismal picture emerges. Remember, teachers in PSRS, the state’s main teacher pension system, must spend at least 28 years paying into the system before their retirement earnings will exceed what they contributed while working. Sixty-five percent of Missouri teachers will not hit that mark and will be net losers in the system. In addition, state pension funds are investing in increasingly risky investments in order to chase higher returns.

What more do we need to know before we push for change?

Most public employees in Missouri belong to what are known as defined-benefit pension plans.
These guarantee a pensioner a specific amount of money every year for the duration of their retirement. In most cases, the amount these plans pay out to retirees is not based on how much money an employee has contributed, but rather on a formula that only takes into account a few years of service. For teachers in PSRS, only the three highest consecutive years’ salaries are used in retirement calculations. This allows individuals who get large pay increases in the final years of their careers to draw considerably more than they ever contributed into the retirement system.

In order to keep the promises Missouri makes to public employees through these plans, the state will face mounting pension obligations. In a recent paper for the Show-Me Institute, Andrew Biggs, resident scholar at the American Enterprise Institute, calculated Missouri’s unfunded pension liabilities. Using standard methods from the Government Accounting Standards Board, the unfunded liabilities are nearly $17 billion.  Using more conservative estimates,  the unfunded liabilities total between $57 and $89 billion depending on the means of calculation.

As liabilities grow, state support for pensions will have to grow as well, and funding for pensions has to come from somewhere. It may come from other public programs, such as higher education, or it may come from taxpayers. The debts we are incurring now will limit our ability to invest in the future of our students and our state. That is a recipe for neither growth nor prosperity.

Collateral Damage of our Pension Systems

Posted on by Michael Q. McShane

Here at the Show-Me Institute, we have harped, for years, on the unsustainability of Missouri’s pension system.  We do this for one simple reason: poorly administered funds hurt the people of our state. They hurt the teachers who have to log 28 years of service in order to get more out of the system than they put into it. They hurt young, mobile teachers who leave before vesting. They have the potential to hurt future retirees when they invest in risky assets that could affect their solvency when more of our baby boomer teachers retire and the bills come due.

We can add another group to that list as well: our institutions of higher education. Chad Aldeman of Bellwether Education Partners (which publishes the website teacherpensions.org) has a new blog out wherein he shows the 10 states that are now paying more into their retirement systems than into their institutions of higher education. It’s not a good list to be on, but Missouri is on it.

Aldeman sums it up well:

“What to make of this finding? That depends on your perspective, but over time, I suspect higher education budgets will continue to be squeezed in favor of pensions. On the retirement side, costs will likely continue to rise. Even amidst one of the longest and strongest bull markets in history, pension plans still haven't recovered, and if pension plans fail to hit their 8 percent investment targets every year, they will need taxpayers to continue bailing them out. Higher education will be one of the primary losers from this arrangement.”

The great economist Herbert Stein is known for the quotation “trends that can’t continue, won’t.”  The worrisome trend in our pension system can’t continue. Absent reform, it’s only a matter of time until it won’t.

(Data used for map are for FY 2014. Retirement data include state and local employer pension contributions. Data taken from http://crr.bc.edu/data/public-plans-database/pension. Higher education expenses include state general fund and “other state fund” contributions; see Table 12: http://www.nasbo.org/publications-data/state-expenditure-report. 

Back to the Future (Taxpayers)

Posted on by Michael Highsmith

This Thursday, representatives of the Missouri State Employees Retirement System (MOSERS) and the Public School Retirement System (PSRS) will meet to decide whether or not to lower expected pension investment return rates. In the past they have assumed a long-term return rate of 8% on pension investments, but due to current underperforming investments, the systems are being forced to reassess that assumption. 

For those unfamiliar with how public pensions work, these meetings may not seem particularly noteworthy, but the decisions made by MOSERS and PSRS will ultimately have a significant impact on taxpayers across the state. Overestimating the rate of return will result in lower initial payments into funds, higher total unfunded liabilities, and higher tax burdens down the road. A lower assumed return requires higher initial payments, but it helps ensure pensioners and taxpayers alike that the pensions can be funded solely out of those payments in the future.

Missouri Treasurer Clint Zweifel hopes to lower the current 8% assumption MOSERS uses to 7.4% this year and drop it to 7% over the next four years.  He predicts that the lower rate would cost Missouri taxpayers tens of millions of dollars, but states “This is the fiscally responsible thing to do, not only for the fund and for its beneficiaries but also for taxpayers in the state.” In the past the Show-Me Institute has written about how pension discount rates should be evaluated in a more realistic manner in order to reduce unwanted future risks.

And we are by no means on the ideological fringe on this question.  In 2014, the University of Chicago’s Business School surveyed professional economists and found that 96% agreed that assuming higher rates of return understates pension liabilities and the costs of providing pensions to public sector workers. That finding underscores the importance of these pension meetings.

Of course, one way to avoid burdening taxpayers with future pension liabilities, which we've also talked about, is to explore defined-contribution plans that consist of employer/employee contributions and investment gains as the final payout. In a defined-contribution plan, taxpayers won’t be held accountable when a retirement plan is underfunded because, by definition, the plan cannot incur liabilities.

But to be clear, pension liabilities are legally binding, so if the state is going to have defined-benefit pensions, it only makes sense that those pensions should be managed in a way that guarantees that employee pensions can be paid. 

A truly fully funded pension plan would ensure that unfunded liabilities do not rise and that pensions are sufficiently funded today rather than shifting the burden to future generations. Let's hope MOSERS and PSRS seize the opportunity to protect pensioners and taxpayers.

Free Speech Under Fire at Colleges and Universities

Posted on by Rex Sinquefield

Churchill called courage the “first” of the virtues.  In the garden of good and evil, it is the one virtue that allows all of the others to flourish—from humility to wisdom and from charity to a genuine respect for the rights of others.

Courage does not tremble in the face of coercion. It does not beg for forgiveness for non-existent crimes.  It stands tall in the defense of freedom . . . and in opposition to the dangers of mob rule or jackbooted tyranny.

All of which brings us to the wave of student protests that hit colleges and universities across the country in the fall of 2015. In one college after another, college presidents and administrators capitulated to unreasonable demands and went out of their way to curry favor with unruly protestors. In doing so, the titular leaders of these citadels of higher education acted both unwisely and with a shameful lack of courage.

The wave of protests began at the University of Missouri in Columbia, and it was here that assault on free speech became crystallized in the now-infamous picture of an MU communications professor calling for “some muscle” to bar campus journalists from a public area occupied by protestors.

Showing real courage in the face of taunts and physical intimidation, Tim Tai, a student photographer on assignment from ESPN, refused to leave the scene and asserted his First Amendment right to videotape in a public place—telling the protestors that his desire was to protect free speech for them no less than for himself.

In a quick succession of events in early November, protesters toppled University of Missouri system President Tim Wolfe, who was unpopular for reasons that had little or nothing to do with race. It began when a black graduate student (the son of a wealthy business executive) went on a hunger strike demanding Wolfe’s resignation. A few days later, black football players (coming to the end of a losing season) joined in a sympathy strike—refusing to play and  exposing the university to a $1 million fine if it were forced to forfeit an upcoming game against Brigham Young University. Then head football coach Gary Pinkel (only days before announcing his retirement for health reasons) chose to play Fletcher Christian to Wolfe’s Captain Bligh – supporting his players in the mutiny against a sitting university president. On the very next day, Wolfe resigned—and black football players agreed to end their strike.

Lessons learned?

We are all limited to our own experience, so no one can tell how prevalent bias and racism may be at an institution the size of the University of Missouri (with 35,000 students).  However, putting aside undocumented claims of deep and widespread bias by a few protestors (including a much-trumpeted but spurious report of a large Ku Klux Klan presence on the MU campus), we will cite three lessons.

First, there is a clear free-speech problem at the University of Missouri and other campuses. People are not allowed to express certain opinions, and even media coverage of protesting students is prohibited by those whose self-righteousness is overwhelming.

Second, you can tell that the values of the university have been misplaced—and indeed corrupted—when the football team and its coach play a decisive role in the resolution of a major conflict. 

Third, it seems to us that the obsessive insistence by protest leaders (not just at MU but within the larger Black Lives Matter movement) that almost everything that is wrong in our society reduces to a single problem—white racism and supremacy in an ongoing saga that casts blacks in the role of victims—is not only unfair but truly unhelpful. More than anything else, it is a major distraction in the way of any serious attempt to come to grips with problems that disproportionately affect black people living in poorer neighborhoods—everything from low rates of K-12 educational achievement to high rates of unemployment and crime among black youth, and from government programs that discourage work to the sharp decline in recent decades of intact two-parent families.

At the end of the day, it may be that what happened at Mizzou last November will serve a useful purpose—alerting many people to the danger of falling into an intellectual trap: supporting calls for greater “diversity” that are more realistically described as an attempt to enforce an unquestioning and frightened conformity.

We hope that the new leaders of the university will have the wisdom and courage to reject an anti-free speech conformity that masquerades as a paradigm-busting “diversity.”

Unions’ Orwellian “Takings Clause” Argument

Posted on by Michael Highsmith

Unions in Idaho and Wisconsin have filed federal lawsuits claiming that employees who don't want to be in their unions are violating the Fifth Amendment's Takings Clause by not paying for union representation. For those unfamiliar with the section, the Takings Clause says that "private property (shall not) be taken for public use, without just compensation." The unions' claim is that the act of collective bargaining is a union's "private property," and that employees who are subject to the union's agreements but reject the union are not compensating these unions for that property interest. 

The irony is that a straightforward reading of the Takings Clause should actually protect individual employees from having their paychecks bitten into without consent. These lawsuits use the reverse argument—requiring the Court to believe that the paychecks of employees are fundamentally union property to begin with, and that nonunion employees are “taking” money away from them by withholding their support.

In the past the Supreme Court has found that "unions have no constitutional entitlement to the fees of non-member employees," so the odds of success in these lawsuits do not appear high. But even if the law wasn't in favor of the rights of individual workers, the idea that unions have a constitutional right to the paychecks of laborers who reject them seems not only undemocratic but also, frankly, immoral.

Workers – whether union members and not – deserve better than that.

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