Missouri’s Challenge: Managing Long-Term Employee Benefit Costs

The Missouri public pension system currently faces serious long-term financial challenges. Missouri taxpayers are facing compound problems regarding the state’s ability to manage effectively both defined benefit public pension and retiree medical liabilities. While current payments to retirees are not in jeopardy, the emerging cost patterns to both current and future members and taxpayers will be predicated upon future asset growth and favorable health care cost trends, both of which present significant risks to taxpayers.

Unfortunately, many of the existing liabilities identified have already been deferred well into the future, and any asset losses will further increase costs just as recognized future asset gains will decrease costs. The assumed annual asset long-term expected return rates for the plans studied range from 8.0 percent to 8.5 percent.

This study serves as a primer, and analyzes the financial position of the major public pension systems in Missouri as of July 1, 2007. While the July 1, 2008, actuarial reports are being compiled, such reports will not reflect the more recent and significant widespread financial decline of assets. As such, the conclusions in this paper should be read with this fact in mind.

Retiree medical obligations are also examined, given the required changes in accounting treatment under Government Accounting Standards Board (GASB) Statements 43 and 45. This change effectively requires public entities to quantify and account for current and future benefits in a manner generally similar to pensions.

Given that, effectively, these employee benefits plans are highly political institutions, any reform efforts will prove difficult. Three important goals should be to have benefit costs that are current, predictable, and affordable.

When comparing the major Missouri public pension programs to the private pension programs of 18 major Missouri employers, three conclusions are evident. First, many employers, both in Missouri and nationwide, have reduced or eliminated defined benefit plans in favor of defined contribution plans. Second, Missouri’s pension benefits and retiree medical plans are on average much more generous than private-sector benefits in the state. Third, the major public pension programs currently have a funded ratio below the 100 percent level. This creates the potential burden of heavy legacy costs, which will almost certainly be borne primarily by a future generation of taxpayers. In contrast, private-sector pension plans are now required to be at least 100-percent funded over no more than a seven-year period.

The author hopes that this paper will educate and provide an increased public awareness for informed action about this important set of topics.