If only someone had warned them about this years ago. Oh, that’s right . . . we did.

The topic of public-employee pension reform has long been important to Show-Me Institute writers. Back in 2013, for example, Andrew Biggs wrote Public Employee Pensions in Missouri: A Looming Crisis. The report did not specifically analyze St. Louis’s teacher pension fund, but the point about the pending crisis applied nonetheless.

When we call attention to impending problems, we are often called alarmists. I have twice had teacher groups circulate action alerts warning members not to respond to my requests for information regarding pensions. It was so bad we actually recorded a podcast telling people we were not trying to take away their pensions. The pushback we received led me to ask, “can we have meaningful dialogue on pension reform?”

So—what changed?

Now, it is the educators themselves raising the alarm. In the KSDK report, Byron Clemens, with the American Federation of Teachers in St. Louis, and his brother, state representative Doug Clemens (D-72nd District), are both quoted on the matter. They highlight how the underfunding of pension systems is harming retirees.

Unfortunately, the Clemens brothers do not call for significant pension reform. They see the symptoms of the problem, but rather than address the structural issues that got us to this point they seem to argue for policies that would only treat the symptoms.

St. Louis’s pension system is underfunded because of the program’s design. Missouri needs to explore new options, such as defined-contribution and hybrid plans, to provide retirees a safe and secure retirement.

The post Rising Concerns about St. Louis’s Teacher Pension Fund appeared first on Show-Me Institute.

Fast forward to 2024, and that sales tax is up for renewal. However, because the pension system is much better funded now, city leaders don’t want to renew the 3/4 cent sales tax as it is. That would generate more money for the pension than it needs.

So Springfield leaders put a commission together to come up with ways to alter the tax revenue distributions before it goes to voters in November.

A Kinsley Gaffe is when politicians accidentally say something truthful they didn’t mean to. (This is the second such gaffe worth highlighting in Missouri in the past few months.) In this case, the statement is filtered through the media, I admit, but the reporter must have got the gist of it from local leaders:

The tax will sunset at the end of March 2025, hence why the city has been adamant to put a replacement tax on the November ballot to avoid a lapse in the sales tax that local shoppers would feel. (emphasis added)

A lapse that voters would feel? Meaning a tax reduction Springfield residents may actually like? Dear Lord, we certainly can’t have that. If they like the reductions, they may not vote to increase the tax when we want them to, Oh, the humanity.

The new proposal is for voters to keep a 1/4 cent sales tax for public safety—which can still include pension costs—and change the rest of the tax (1/2 cent) to fund “comprehensive plan capital and parks projects and neighborhood and community initiatives.” (More on that issue later.)

Springfield still has a defined-benefit pension plan for its public safety employees. It should have switched to a defined-contribution plan years ago. At least the city, according to the article, closed the old plan to new members several years ago and, presumably, replaced it with a less generous plan for new hires. That’s progress, but a defined-contribution plan for Springfield employees would have been better for the taxpayers and the city. Throwing tax dollars at the pension fund appears to have worked for now, but further change is needed. As former Show-Me Institute Chief Economist Joe Haslag wrote about the Springfield pension situation years ago: “The existing approach got Springfield into this situation. Some reform is needed to avoid the same problems in the future.”

The post Springfield Wants to Be Darn Sure Its Sales Tax Rate Doesn’t Ever Go Down appeared first on Show-Me Institute.

If I offered you $100,000 a year for the rest of your life to retire from your current job, would you take me up on the offer? What if I said you could have the money and also get a different job if you wanted? If you would answer yes to these questions, you have gone a long way toward understanding why turnover is high among public school superintendents. We financially incentivize them to “retire.”

Take a look at the recent article from Springfield News-Leader’s Claudette Riley, in which she discussed the problem of superintendent turnover. Nearly every person cited in the report was a superintendent who has retired and is working another job. Doug Hayter retired as superintendent of Branson Public Schools; he now draws his retirement benefit and serves as the executive director of the Missouri Association of School Administrators (MASA). Kelly Hinshaw and John Jungman, also quoted in the report, are retired administrators who now work for MASA.

Given the rules of our current state pension system, it makes financial sense to do just as these folks have done. Consider some of the other retiring superintendents listed in Riley’s report. Shawn Randles is retiring from the Logan-Rogersville School District. After a 31-year career, he’s eligible to draw 75 percent of his final average salary of $152,002 for the rest of his life. Depending on the payout he chooses, this could be as much as $114,000 a year. According to Riley, Randles “plans to start a second career in an education-related field.”

Chris Ford, Fordland’s “retiring” superintendent is in a similar position. He’s eligible to draw $108,000 a year for the rest of his life while continuing to work. He has taken a position at Evangel University.

We are told turnover among superintendents is high because the job is stressful. It is curious then that many retire and take up similar positions in other states. Take Crane’s retiring superintendent, Chris Johnson, who has accepted the superintendent post in Prairie View, Kansas.

Stress may be a factor, but the truth is that superintendent turnover is high because our state’s pension system makes it financially beneficial for our veteran administrators to leave. They can earn more by retiring than they could if they kept working.

As Riley’s piece explained, superintendents are eligible to retire after 30 years of service in the profession or after their years of service plus their age equal 80. This means that someone who starts teaching right out of college could be eligible for retirement by their mid-50s. These individuals can then draw their pension and take on new roles, as long as those roles are not covered by Missouri’s Public School Retirement System.

We should applaud efforts to mentor and train superintendents, but if we truly want to reduce turnover the solution is clear—we must change our retirement system. This does not have to mean abandoning the current defined-benefit pension system, though offering a defined-contribution option is something that should be considered. The solution could be as simple as allowing superintendents to draw early disbursements from their pension fund while retaining their current jobs. This would diminish the financial pull to retire and take up a new job in another state or outside of PSRS.

As long as we continue to make it financially lucrative to retire, we will continue to see our best educational administrators retire shortly after they hit year 30.

The post To Reduce Superintendent Turnover, Change the Pension System appeared first on Show-Me Institute.

Missouri is in that majority.

Missouri’s debt burden was $8.2 billion in fiscal year 2020. That’s $4,400 per taxpayer needed to fully pay the state’s bills, up from $4,300 the year before. Much of this debt burden comes from unfunded retirement obligations, for which “the state had only set aside 60 cents for every dollar of promised pension benefits and 6 cents for every dollar of promised retiree health care benefits.” This debt burden earned Missouri a “C” grade and a ranking of 24 out of the 50 states for fiscal health.

This report provides further evidence that Missouri was not in a financial position to successfully weather the economic downturn that followed the COVID-19 pandemic, something my colleague Elias Tsapelas and I have written about. Re-evaluating our tax structure and tackling pension problems (by shifting employees to defined contribution accounts, for example) would likely improve Missouri’s grade and ranking in this report. Fixing the state’s fiscal health is a big task, but it’s something that lawmakers should start to prioritize.

The post Missouri Is in Poor Fiscal Health appeared first on Show-Me Institute.

Advocates for Missouri’s current defined-benefit pension system argue that this type of system, where teachers are promised a generous and guaranteed pension once they retire, is needed because it increases teacher retention. Yet, there is little evidence that this type of system is a cost-effective method for increasing teacher retention. Rather, the example of these superintendents demonstrates how the system pushes out high-quality individuals. It does the same for teachers (teachers and superintendents are in the same pension system). When teachers hit 30 or 31 years, regardless of their quality or their desire to continue teaching, the financial incentive of the pension pushes them out.

Recently, Gov. Parson asked school superintendents to come up with a plan to increase teacher pay. One solution, which I have little hope will ever be recommended by the superintendents, is to change how we compensate teachers. A pension is basically a form of delayed compensation. We require teachers and their districts to contribute 14.5% of their salary to the pension system (the numbers are different in St. Louis City and Kanas City). That’s 29% of a teacher’s salary that is going into a pool that they may have access to if they make it to retirement.

We could give teachers in Missouri a 10% raise next year, with minimal cost to the state, if we just change this system.

Currently, teachers in the Public School Retirement System (PSRS) do not contribute to Social Security. The pension system is their only required retirement savings. In this proposed scenario, the teacher would receive a 10 percent raise on his or her salary. The teacher would begin contributing to Social Security (6.2 percent from the individual and the employer) and would be eligible for Social Security benefits. Additionally, the teacher and his or her employer could contribute a combined 5 percent of salary to a defined-contribution retirement account, such as a 401k or a cash balance plan. Of course, with a smaller raise the teacher could contribute more to retirement. 

There are numerous benefits to this proposal. First, teachers would own their retirement accounts. They would not lose any money if for some reason they do not vest at five years. They could also continue to work past 31 years and their accounts would not lose value. Teachers could also choose to invest more in their account, as many do now in 403b accounts.

The biggest benefit is that teachers would have higher salaries today. If we want to keep our best teachers and superintendents, higher salaries are a much more effective tool than outdated pension systems.

The post We Could Give Teachers a Ten Percent Raise Next Year appeared first on Show-Me Institute.

Dear Missouri teachers and all Missouri citizens:

As a Missouri public-school employee, I don’t pay into Social Security; I pay into the Public School Retirement System (PSRS) pension—to the tune of 13-15% of my salary.

The Missouri pension system for public employees REPLACES Social Security (i.e., I will never get Social Security or my spouse’s SS); that’s why the word “pension” misleads a lot of people.

We don’t get both.

Last month, a Missouri state representative from Nixa, MO, introduced a bill to change the current funding structure for teacher pensions to a defined contribution rather than a defined benefit plan, claiming that taxpayers might need to pay for any shortfalls in future years should the funds not be adequate. THIS IS NOT CORRECT.

Missouri’s PSRS has long been admired nation-wide as one of the MOST SOLVENT pension plans IN THE NATION.

We (teachers) are not the enemy; we are not the problem. Missouri’s financial problems should not be balanced on the backs of teachers who have paid into the system for their entire careers. The Missouri government set the rules. We have followed them. They have not. Now, they want to blame teachers for the State’s money woes, and steal from teachers’ retirement again!

Please call your state reps to support teacher-retirement funding and not changing it!

PLEASE.

Claim 1: “I pay into Public School Retirement System (PSRS) pension— to the tune of 13-15% of my salary.”

MOSTLY TRUE

Since 2012, Missouri teachers have paid 14.5 percent of their salary into the public school retirement system. This is matched by another 14.5 percent from the employer. It rose steeply from around 10 percent in the early 2000s in an effort to address unfunded liabilities (See Figure 3 here).

Claim 2: “The Missouri pension system for public employees REPLACES Social Security (i.e., I will never get Social Security or my spouse’s SS); that’s why the word “pension” misleads a lot of people.”

MIX OF TRUE AND FALSE

Missouri teachers do not pay into Social Security, but they may still be eligible for a benefit. According to the PSRS website, teachers “may qualify for Social Security benefits if you have 40 units (10 years) of Social Security-covered employment. You may also be eligible for benefits from Social Security through your spouse or ex-spouse (living or deceased).”

Claim 3: “Last month, a Missouri state representative from Nixa, MO, introduced a bill to change the current funding structure for teacher pensions to a defined contribution rather than a defined benefit plan…”

FALSE

House Bill 864 does not change the structure of current defined-benefit pension system for anyone in the system. In fact, it sets the current PSRS system as the default option for all incoming teachers. It would simply allow teachers the option of choosing a defined-contribution (DC) plan if they want to. Teachers who opt into the DC plan could chose to contribute between 3 and 50 percent of their salary into their own individual retirement account. The school district would be required to contribute 5 percent. If teachers wanted to stay with their traditional plan, they could. HB 864 would just give them more options.

This is a very important point that is worth repeating. The current bill, which has not even been referred to a committee and has virtually no chance of passing, would not change anything for anyone unless the individual teacher chose to opt into the DC plan. (To find out why some teachers might choose a DC plan, click here.) Florida has a DC option and roughly a quarter of teachers choose this plan.

Claim 4: “Missouri’s PSRS has long been admired nation-wide as one of the MOST SOLVENT pension plans IN THE NATION.”

MIX OF TRUE AND FALSE

Yes, it is true that PSRS is rated as one of the best funded pension systems in the nation. According to PSRS, PSRS was 84 percent funded as of June 30, 2018. This amounts to over $7.4 billion in unfunded liabilities. According to an analysis by Rebecca Sielman, an actuary at Milliman, this puts PSRS in the top quarter in terms of funded ratios among the 100 largest U.S. pension plans. This fact, however, says more about the sad state of other systems.

It should be noted that these comparisons are slightly suspect as they are based on plan reporting, and plans use very different assumptions. In determining that PSRS is 84 percent funded, the plan uses a high assumed discount rate of 7.75 percent to calculate liabilities. The median discount rate was 7.5 percent. That difference may not sound like much, but when you are talking about compound interest on billions of dollars, it adds up quickly. As Sielman writes, “A relatively small change in the discount rate can have a significant impact on the Total Pension Liability.”    

In an analysis for the Show-Me Institute, economist Andrew Biggs shows that if PSRS used a Corporate Bond Yield rate of 4.26 percent, the plan would be 52 percent funded and would have over $27.7 billion in unfunded liabilities.

It’s important to understand that not all of the money that is contributed to a teacher’s pension actually ends up funding the pension. Teachers contribute 14.5 percent of their pay into the pension, and their employer adds an equivalent amount, so the amount that goes into the pension is equal to 29 percent of the teacher’s salary. Only 17.44 percent is required, according to plan actuaries, to pay for the teacher’s retirement benefits. This means nearly two-fifths of the contributions are used to pay for unfunded liabilities (see p. 106 here).

Claim 5: “Missouri’s financial problems should not be balanced on the backs of teachers who have paid into the system for their entire careers. The Missouri government set the rules. We have followed them. They have not. Now, they want to blame teachers for the State’s money woes, and steal from teachers’ retirement again!”

COMPLETE NONSENSE

Ok there isn’t really a claim here, but there is a completely nonsensical assertion that this bill would somehow take money away. A version of this myth has been repeated numerous times—they want to take our pension money to pay for roads is a popular one. This bill (and every other pension reform bill that I have ever seen in Missouri) would not touch teacher contributions to the system. There is absolutely no mechanism for the state to take that money.

CONCLUSION

Teachers who spread viral posts with completely inaccurate information do not reflect well on their profession. Why are you trying to scare your colleagues? And have you thought of the unintended consequences?

My advice, teacher to teacher, is the next time you see a viral post like the one above and feel compelled to do something, consider this: read the actual bill, think critically, and do not blindly share hyperbolic posts filled with factual errors.

The post Viral Facebook Post about Missouri Teacher Pension Bill Is Filled with Falsehoods appeared first on Show-Me Institute.

The St. Louis Public School Retirement System (STLPSRS) has its own problems—it was just 64 percent funded in 2016, with 5,000 current teachers supporting 4,600 retirees. Teachers have been contributing 5 percent of payroll, with St. Louis Public Schools (SLPS) and charter schools making up the rest of what the annual actuarial analysis determines is necessary to keep it funded at least 70 percent. As a result, the bill for SLPS and the charter schools has climbed to over 15 percent and, in 2018, the actuarial analysis determined it needed to be 19 percent. However, difficulty keeping up with increasing costs led SLPS to request that the Missouri state legislature cap their contribution rate at 16 percent. In addition, teacher contributions would climb by one-half percent each year until they reach 9 percent (new teachers in fall 2018 will immediately begin paying 9 percent). According to STLPSRS, that would leave them with a $192 million shortfall within 15 years, so they’re suing SPLS and the St. Louis charter schools.

Economic conditions, unaffordable benefit promises, and an unwillingness to use realistic investment return assumptions have resulted in precarious fund positions, lawsuits, and attempts to balance the books on the back of the youngest workers. Does it have to be this way? No. Many states are moving away from defined-benefit plans (pensions) and toward defined-contribution plans [like 401(k), cash-balance, or hybrid plans]. In some cases, all new employees are placed in the new plans; in others, they can choose between the state defined-benefit plan or the new options.

We’re also seeing teacher retirement benefit innovation from within public education. In 19 states, charter schools may choose whether or not to participate in their states’ pension plans. A recent analysis of charter school participation in five states that make participation optional found that the schools most likely to opt out of the state plan are urban, elementary schools, and those that are managed by charter networks. Most of the opt-out charter schools offer their teachers 401(k) or 403(b) plans, and the teachers are vested in less than one year. The reasons given for choosing this path were mostly that the schools wanted to lower their estimated costs, give teachers a wider range of investment options, and make their teacher benefits more portable. For today’s youngest teachers, this is an important point. Most of them will not meet a vesting period of ten years in one state and, when that happens, they lose the amount that their employer contributed for them.

The good news for teachers and taxpayers is that there is time to protect current and future retirees before the system is bankrupt. The building isn’t on fire yet. However, those of us who pay close attention to this complicated topic are starting to see smoke under the door. It’s time to start talking about how to stabilize Missouri’s teacher pension systems.

The post A Retirement House of Cards appeared first on Show-Me Institute.

The post Policy Solutions for Missouri’s Government Employee Pensions appeared first on Show-Me Institute.

According to a 2017 asset/liability analysis commissioned by KCPSRS, the system only has enough money in the bank to pay 64 percent of what it owes to current and future retirees. We’ve written about this problem before, but it’s worth repeating. The fund needs to earn at least 5 percent per year, every year, for the next 20 years, or they’ll be out of money. That’s right—no money left in the fund. (For reference, between 1998 and 2018 the annualized Dow-Jones Industrial Average inflation-adjusted return was 5.528 percent.) Not surprisingly, the KCPSRS has requested increases to the school contribution rate over the next few years from the state legislature. So, Kansas City Public Schools and Kansas City charter schools will have to take another chunk of their revenue out of the classroom to send to KCPSRS.

STLPSRS was also just 64 percent funded (see p. 11) in 2016 and has almost as many retirees as active teachers. An annual analysis by actuaries determines how much SLPS and the St. Louis charter schools have to contribute to the fund each year. However, difficulty keeping up with increasing costs led SLPS to request that the state legislature cap their contribution rate at 16 percent, and they did. Unfortunately, STLPSRS looked at how that cap would affect the fund and determined that it would leave them with a $192 million shortfall within 15 years, so they’re suing SLPS and the St. Louis charter schools.

Economic conditions, unaffordable benefit promises, and an unwillingness to use realistic investment return assumptions have resulted in shaky fund positions, lawsuits, and balancing the books on the back of the youngest workers. What’s worse is that in 2017, the average pension payment took about $1,200 per student out of the classroom.

Does it have to be this way? No. We’re actually seeing teacher retirement benefit innovation from within public education. In 19 states, charter schools may choose to participate in their state’s pension plans or not. A recent analysis of charter school participation in five states found that the schools most likely to opt out of the state plan are urban schools, elementary schools, and those that are managed by charter networks. And new schools in high-cost states like California are much less likely to join than they were just five years ago.

Most of the opt-out charter schools offer their teachers 401k or 403b plans in which the teachers are vested in less than one year. The reasons given for choosing this path include wanting to lower their estimated costs, giving teachers a wider range of investment options, and making their benefits more portable.

For today’s youngest teachers, this is an important point. Most of them will not meet a vesting period of ten years in one state, which means they will lose the amount that their employer contributed for them. Even if they stay, Missouri teachers have to work for 26 years before their contributions are higher than their expected benefit. When you take nearly 10 percent off the top of a teacher’s salary, plus another 6 percent for Social Security, you have to wonder why anyone would want to be a public school teacher in Kansas City or St. Louis.

The post Innovation Brings Hope for Teacher Pensions appeared first on Show-Me Institute.

THE SOLUTION: Defined contribution plans.

Defined contribution (DC) plans consist of employer/employee contributions into individual accounts—think 401(k)—which employees can manage as they see fit. Upon retirement, the funds are available to employees. DC plans fundamentally differ from DB plans in that they cannot incur unfunded liability (so taxpayers are not on the hook), they put investment decisions into the employee’s hands, and they are transferable from one job to another.

WHO ELSE DOES IT? Public DC plans exist across the nation; states such as Michigan and Alaska offer DC plans for new state employees, while others such as Florida offer both DC and DB plans.

THE OPPORTUNITY: Pension reform offers a chance to stop the bleeding. DB plans cannot (by definition) incur unfunded liabilities. DC plans also offer employees a retirement account that they can manage themselves and take with them if they change jobs in the future.

KEY POINTS

• DC plans can protect Missouri from devastating budget shortfalls.
• When a DB plan’s investment returns are below (sometimes unrealistic) assumptions, taxpayers can be forced to pay the cost.
• DC plans put investment decisions in the employee’s hands and can be transferred from one job to another.
• Shifting to DC plans reduces the political incentive to overpromise when impacts won’t be felt for years.

SHOW-ME INSTITUTE RESOURCES

Policy Study: Public Employee Pensions in Missouri: A Looming Crisis

Policy Study: Missouri Transition Costs and Public Pension Reform

Essay: The Funding Status of State and Local Government Pensions in Missouri

For a printable version of this article, click on the link below. You can also view the entire 2018 Missouri Blueprint online.

The post 2018 Blueprint: Public Pension Reform appeared first on Show-Me Institute.

As the authors of the KCPSRS analysis suggest, “long-term pension fund success is based on all three levers working together.” Those levers are contributions, benefit design, and investment design. As we’ve noted before, the plan is already shifting to riskier assets in an attempt to secure higher rates of return on investments. The system will likely keep the benefits design the same. So, what could they change in order to shore up the system? There is only one lever remaining: contributions.

Currently, teachers and their employers each pay 9 percent into the system for a total of 18 percent. An additional 12.4 percent is put into Social Security. The authors of the KCPSRS analyses suggest the system may need to increase contribution rates if they want to avoid insolvency. They project what the impact would be of increasing the contribution rate to 22 or 26 percent. Of course, increasing contributions will help the financial health of the system. It will also cost teachers.

Keep in mind that the contribution rate was set by the legislature at just 15 percent from 1999 to 2012. The legislature allowed for fluctuation in the contribution rate, but capped the maximum amount at 18%. In other words, increasing the contribution rate to the 22 or 26 percent highlighted in the KCPSRS report would not only require an act of the legislature, but possibly an act of a higher power. It is an increase that may be unprecedented in Missouri pension history.

Increasing contributions but not benefits means that employees of the future will get significantly less benefit from the pension system than their predecessors. They will, in effect, be paying for the benefits of the past.

The real question is how much are employees willing to pay for the same or a reduced benefit? Teachers today may be willing to put their 9% into the system, but would they be willing to put 11%? How about 13%? At what point do teachers decide they would rather have their contributions in a defined-contribution account, rather than an account that goes to pay for someone else’s benefits? 

The post How Much Are Kansas City Teachers Willing to Pay for their Pension? appeared first on Show-Me Institute.

Missouri’s State Auditor recently released an audit on the City of Bridgeton’s Employee Retirement Plan, and the picture painted was bleak. In addition to finding that the city’s Finance Commission failed to meet even once from 2012 to 2014, the report says the plan is only 67% funded and that the unfunded liability is approximately $14 million. The plan’s current funds will not be able to pay the benefits that retirees have been promised. The combination of insufficient contributions and lackluster investment returns has brought put the existing plan in its current condition.

Defined-benefit plans like Bridgeton’s typically involve a commitment to make monthly payments to employees for the remainder of their lives. In order to sufficiently fund the promised benefits, plans assume a rate of return on the contributions that they invest. Those assumptions are often too rosy; Bridgeton’s assumed rate has been 7.5%, while over the past ten years the time-weighted return has only been 4.16%.

Over time, the funding gap widens and the result is a large gap between the amount the city has promised retiring employees and the amount the city has set aside for that purpose. In Bridgeton’s case, no payments have been withheld from retirees, but in order for the city to meet its future obligations, contributions have to increase. Either funds must be allocated away from other public services, or taxes must go up.

This is exactly what has happened. In April 2015, Bridgeton increased its hotel service occupation tax from $0.85 to $3.00 per day. A portion of the additional revenue goes toward increasing the plan’s contributions by $200,000 each year.

Bridgeton is not alone. The Pew Charitable Trusts reports the shortfall between state-run promised pension benefits and available funding is nearly 1 trillion dollars nationwide. Defined-benefit plans are often legally binding, so when investment returns fall short of what was predicted for the plan years ago, taxpayers can be forced to foot the bill.

The good news is that Bridgeton’s defined-benefit plan was closed to future employees in 2012 and replaced with a defined-contribution plan. In a defined-contribution plan – think 401(k) – benefits are not paid out indefinitely to employees. Rather, upon retirement the funds that have been accrued are made available to the employee. The key difference between the two is that a defined-benefit plan makes a promise it may not be able to keep without taxpayer assistance, while a defined-contribution plan, by definition, cannot incur a funding gap.

Defined-contribution plans can protect taxpayers, municipalities, and employees from having to worry about underfunded pension plans or budget shortfalls. Bridgeton took the leap to defined-contribution in 2012 to avoid exacerbating its current funding problems; other defined-benefit plans in Missouri should consider doing the same.

The post Of Underfunding and Overpromising appeared first on Show-Me Institute.

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.  

The post Public Pensions Hadn’t Planned for This appeared first on Show-Me Institute.

Often, people who propose reforming public employee pension systems—people like me and the scholars at the Show-Me Institute—get painted with a very negative brush. In 2013, the American Federation of Teachers listed the Show-Me Institute and two other organizations as personae non gratae for pension fund managers, suggesting that plans should disinvest from funds affiliated with the Institute. In 2015 (and at various other times), Steve Yoakum, executive director of the Public School Retirement System of Missouri, attacked SMI in a letter to retirees. He wrote, “As has become a pattern, ‘studies’ done by the Show-Me Institute and their attendant comments tend to mislead both participants and Missouri citizens and this was no exception.”

What’s interesting is that the report from the University of Missouri faculty makes many of the exact same arguments that we have made at the Show-Me Institute for years. For example, the committee noted that DB plans can provide excellent retirement security for individuals who work a full career at the university. However, few actually do this . Indeed, the report noted “that only 16% [of employees] reach 20 or more years of service.”

What the majority of the members of the committee came to realize was that the standard DB pension plan was simply too risky. The system was shouldering a burden that it could ill afford to carry. So, they suggested a change.

Pension reform is not a crazy conspiracy to rob retirees, as some might have you believe. It is simply common sense planning. It is time for other DB pension systems in Missouri to follow the University of Missouri system’s lead. 

The post University of Missouri System Reformed Pensions in 2012. Other Plans Should Follow Suit appeared first on Show-Me Institute.

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.

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Some background: When Springfield police and fire department employees won increases to their pension several years back, they agreed to pay for it themselves through employee contributions. However, the cost of the benefit has ballooned as the number of people paying into the pension fund has shrunk. Because the pension is a defined benefit plan, growing unfunded liabilities now put the entire pension fund at risk. In this case, taxpayers may end up paying for a benefit they were told they wouldn’t have to cover.

Springfield is not the only municipality facing a defined benefit pension with growing unfunded liabilities. According to SMI’s 2016 study on the funding of Missouri’s state and local pension liabilities, the average public pension could be between 48 and 59 percent underfunded. According to that same study, total unfunded liabilities for Missouri’s public pensions could be as high as $89 billion.

In theory, a defined benefit pension plan can be fully funded and operated in a sustainable way. But in practice, elected officials tend to promise more than they can deliver, and defined benefit pension systems can run into problems years or even decades after they were put into place.

For cities that want to avoid issues like the one facing Springfield, making the switch to a defined contribution plan might be the way to go. With a defined contribution pension, the city would make regular contributions into an employee-managed retirement account throughout the employee’s career. When the employee retires, he or she would draw from the money deposited into that account plus or minus any investment gains or losses. Underfunding situations like the one in Springfield would be impossible, because a defined contribution pension is necessarily and by definition fully funded.

A defined contribution pension benefit is not a cure-all, because benefits already accrued will have to be paid out pursuant to the older defined benefit plan. But switching to a more sustainable benefit system might keep a potential problem from becoming a catastrophe. 

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—Steve Yoakum, executive director of the Public School Retirement System of Missouri (PSRS)

Steve Yoakum is absolutely right. As I have often said, teacher pensions are great for those who stay for 30 years, but they are not for those who don’t. Indeed, this was the key finding of a recent report by researchers at Bellwether Education Partners and The Urban Institute.

The report examines how the value of teacher contributions and teacher pension benefits accrue. In Missouri’s system, 29% of a teacher’s salary is contributed to the pension, 14.5% from the district and the teacher. As you might imagine, these contributions accumulate over time. Unfortunately for teachers, the value of their pension does not accumulate at the same rate because the pension is not tied directly to contributions. The illustration above shows how the value of the contributions can exceed the value of the benefits.

The report finds the break-even point for Missouri teachers is 28 years. That means a Missouri teacher must work for 28 years before the value of their pension exceeds the value of their contributions.

But how many teachers actually make it to 28 years? According to the report, just 38%. In other words, 62% of Missouri teachers are going to pay more into the pension system than they are going to get out. 

“After a full career,” Missouri’s teacher pensions are great. For those not working a full career, Missouri’s teacher pension system is a raw deal. We could fix this, and solve a host of other pension problems, by moving from a defined-benefit plan to a defined-contribution plan. Until we begin to tie retirement benefits directly to contributions, many teachers will continue to get shortchanged. 

The post For Most Teachers in Missouri, Pensions Are a Raw Deal appeared first on Show-Me Institute.

It is unfortunate that taxpayers and employees are in this position, but this situation could have been avoided if the Springfield Police-Fire fund was a defined contribution plan instead of a defined benefit plan.

Defined benefit plans are plans where retiree benefits are guaranteed based on a formula that typically takes into account various factors like years of service and final average salary. Since the benefits are guaranteed, this creates a liability for the pension plan which must keep paying out benefits as long as the pensioner is alive.

With defined contribution plans, benefits are paid at retirement and consist of the employer and/or employee contribution plus any investment gains or losses. There would be no underfunding of promised benefits since the balance of the account is the benefit. It would also spare taxpayers from having to make up any funding shortfalls since there is no liability going forward.  

Alas, Springfield’s police and fire pension is not a defined contribution plan and it is possible that taxpayers will have to cover any shortfalls that occur. For cities/states that want to avoid situations like this, transitioning to a defined contribution plan might be the way to go. It is not a cure-all (benefits already accrued will still have to be paid for), but it could prevent a potential problem from turning into a catastrophe.

The post No Need for Pension Problems in Springfield appeared first on Show-Me Institute.

HB 485 seeks to address this problem by shifting new hires into a hybrid pension plan. A hybrid pension plan is one that contains elements of both a defined benefit (DB) plan and a defined contribution (DC) plan.

Read the full testimony: .

The post On The Proposed Hybrid Pension Plans For Missouri Government Employees appeared first on Show-Me Institute.

Jessica Canale is an art teacher in North Saint Louis City. She commutes every day from O’Fallon, Illinois. While it might seem like a trivial decision to choose between working on the east or west side of the Mississippi, in actuality, when it comes to the money that will be available when she retires, it matters a great deal.

In January, Dick Ingram, executive director of the Illinois Teachers Retirement System (TRS) explained just how bad Illinois’ fiscal position has become. In order to deliver promised benefits, the state has divided teachers into two categories—Tier I and Tier II.

Tier I teachers will enjoy promised benefits, while Tier II teachers, those hired after 2010, will receive greatly reduced benefits. According to Ingram, “Tier II is designed to help solve the financial problems faced by TRS and the other systems by reducing pension benefits for these new members. Lower pensions means reduced long-term costs for the state.”

But “reducing pension benefits” is an understatement. In order to pay for Tier I pensions, Tier II teachers and administrators will have to contribute 9.4 percent of their salary while only receiving 7 percent toward their retirement. No wonder Jessica would rather commute to Saint Louis than give 2.4 percent of her compensation to older teachers.

But Missouri is not much better. According to the National Council on Teacher Quality, Missouri’s pension plan earned a grade of D-.

In his 2013 policy study on public employee pensions, AEI resident scholar Andrew Biggs called the situation in Missouri a “looming crisis.” Luckily, he offered several suggestions:

• Promote better accounting, which will show the extent to which plans are underfunded.
• Attract and retain quality public employees like Jessica by changing existing plan structures to either a defined contribution or a cash balance approach.
• Give employees more freedom to choose the retirement plan that works for them.

As Show-Me Institute analysts have continuously argued, there are solutions to Missouri’s pension problems. For teachers like Jessica, Missouri has to do better.

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