TIA uses full accrual accounting, which tracks not just current bills but also long-term promises such as pensions and retiree healthcare. Unlike state budget reports that can hide liabilities, TIA’s numbers tell the fuller (and often less flattering) story.

This year, Missouri reported a Taxpayer Surplus™ of $200 per taxpayer, meaning the state had enough money on hand to pay all its current bills with a small cushion left over. By TIA’s definition, that just clears the bar for a “B” grade, which applies to states with a surplus between $1 and $9,999 per taxpayer.

The grade reflects a genuine, if modest, improvement. In 2023, Missouri’s shortfall stood at $700 per taxpayer. That was enough to earn a “C” and a middling 25th-place finish nationally. In years prior, the story was worse: in 2020, the state’s Taxpayer Burden™ was $4,400.

So what’s behind the jump from “C” to “B”? Mostly, factors outside the state’s control. According to TIA’s report (page 83): “Missouri may lose $6.5 billion in federal funding (16 percent of expenses) if allocations return to 2019 levels, adjusted only for inflation.” That funding came largely through pandemic-era support, and it helped cover immediate costs. But it isn’t permanent.

Meanwhile, strong stock market returns—especially in 2022—helped reduce Missouri’s reported pension liabilities. Yet these gains are fragile. They can quickly disappear in volatile markets, as TIA’s report explains, and they don’t fix structural imbalances in how pension systems are funded.

Those structural issues remain. As Sheila Weinberg, founder and CEO of TIA, put it in a recent correspondence: “even with a 26% investment return in 2022 and an additional $1.1 billion contribution in 2023 . . . the state’s contributions and investment income are not enough to keep pace with the interest and new benefits accruing on the pension debt.”

That’s a concern taxpayers should take seriously. Missouri’s pension systems, especially the Missouri State Employees’ Retirement System (MOSERS), have long carried unfunded obligations. The surplus reported today is in part a reflection of how those liabilities are calculated—not a signal that they’ve been resolved.

That brings us back to the bigger issue: standards. Missouri, like nearly every other state, follows Governmental Accounting Standards Board (GASB) rules, which permit states to understate liabilities and delay recognizing certain costs. TIA recommends moving instead to the standards used by publicly traded companies: full accrual accounting and ERISA (Employee Retirement Income and Security Act)-like funding requirements for pensions.

Judi Willard, TIA’s communications director, summarized the case for changing standards plainly: “[these reforms] will create long-term stability for the states, create transparency in government spending and protect the taxpayers from unscrupulous elected officials who would rather spend now and pay later, which sadly the current accounting standards allow.”

There’s merit to that argument. Missouri’s improved ranking may be encouraging, but it is not a sign that long-term fiscal problems have been solved. The gains are largely circumstantial. Without broader reform in how the state budgets and reports its obligations, today’s surplus could just as easily become tomorrow’s deficit.

So yes—credit where it’s due. Missouri’s “B” grade reflects careful budgeting, a resilient economy, and a short-term boost from federal aid. But structural pension pressures remain. Federal dollars are fading. And the state’s accounting standards still obscure the true cost of government.

A budget that only looks balanced on paper won’t protect taxpayers in the long run.

The post Missouri Earns a “B” in New Fiscal Report—but Don’t Pop the Champagne Yet appeared first on Show-Me Institute.

The post Public Employee Pensions in Missouri: A Looming Crisis appeared first on Show-Me Institute.

Consider the costs to taxpayers. As of 2018, the plan has assets equal to less than 70 percent of their liabilities and—just to maintain that level of funding—the Missouri state government will have to contribute nearly 20 percent of its total employee payroll to the plan this year. In addition, employees hired after 2011 contribute 4 percent of their paychecks to the system. Imagine a private-sector benefit that cost nearly one-quarter of employee salaries but was considered so sacrosanct as so be untouchable. The hard truth is that we’re going to have to start talking about policy changes aimed at averting a funding crisis. Biggs’s essay explores various options, including grandfathering current plan participants and designing a new system for future employees.

Of course, MOSERS is just one of many public pension plans in the state. The pension systems for teachers aren’t any better.  Teachers argue that they work for low salaries and, in exchange for their sacrifice, they are “taken care of” with generous retirement benefits. But that is only true for those teachers who start their teaching career right out of college and work in the same state for at least twenty-five years. In fact, an analysis of the Missouri Public Schools Retirement System (PSRS)—the plan that covers all Missouri teachers other than those in Kansas City or St. Louis—found that a teacher in the Springfield district would have to work for 26 years in order to hit the “crossover” point at which their total retirement benefit is worth more than what they contributed.

Imagine that! Working for 26 years before your retirement plan is worth more than you put in.

While the PSRS is in better financial health than MOSERS, total annual contributions to the plan are 29 percent of payroll (with 14.5 percent coming from the teacher and 14.5 percent from the school district). This is only likely to get higher because there are now 78,000 teachers (active members) supporting 60,000 retired teachers. In 2000, roughly the same number of active teachers supported just 25,000 retirees. In addition, while the plan is currently nearly 84 percent funded, it has an unfunded liability of more than $7 billion and its administrators continue to assume that the plan will earn a 7.6 percent return on its investments every year, indefinitely. You don’t have to be a math teacher to know those numbers just don’t add up.

The post Public Employee Pensions: Time to Get Our Heads Out of the Sand appeared first on Show-Me Institute.

Similarly, an investment that initially seems negligible can go a long way given enough time to compound, and this lesson applies when saving for the future. In June, the Missouri State Employees’ Retirement System (MOSERS) decided to reduce its assumed return rate from 8% to 7.65%, meaning that altogether, the amount members will need to contribute next year will increase by almost $50 million. This extra cost today is hardly ideal, but in the long run it helps avoid a much larger bill.

Even though MOSERS made a mere 0.35% change to their expected return rate, the long-term impacts are huge. With a lower rate of return on its assets, a pension plan’s initial contributions must go up in order to keep benefits constant. In other words, a plan compensates for slower investment growth by putting more money in initially.

This change in funding highlights the risks associated with promising high investment returns. If a pension plan’s actual returns are lower than predicted, the result is a gap between available funds and the amount that has been promised to retirees. In the case of a guaranteed public employee retirement fund, taxpayers can be asked to cover this difference, and as the gap grows, so does the burden on taxpayers.

With a current funding ratio (current assets divided by the net present value of liabilities) of 67.8 percent, the plan (according to a Columbia Tribune report) will require $394.5 million this year to cover promised benefits.  But this contribution amount will only be sufficient if investment returns match the 7.65% expectation.  If investment growth is lower (in FY 2016 MOSERS generated a time-weighted return of only 0.3%), then the funding gap will widen over time. It’s easy to project high investment returns today, but making those predictions come true tomorrow is another story.

Slight adjustments in return assumptions can have tremendous impacts over an employee’s lifetime, so properly estimating investment returns is essential to a plan’s sustainability. (This essay by Andrew Biggs provides a comprehensive discussion of public employee pension funding for readers who want to explore this topic in more depth.) If pension benefits are guaranteed to employees, then the cost of these promised future benefits should be priced using returns on very low risk assets like government securities, which are currently far below 7.65 percent. Lowering the assumed return is a step toward greater transparency regarding the true costs of pension liabilities.

The post MOSERS Wisely Reconsiders Past Assumptions 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.

The post Back to the Future (Taxpayers) appeared first on Show-Me Institute.

How about using some of that surplus to pay off the state’s pension liabilities? The Missouri State Employees Retirement System (MOSERS), for example, has an unfunded liability of more than $3 billion (it is really much larger than that, but for the sake of argument, let’s go with the official numbers). Even if the state moved to a defined contribution (DC) plan immediately, the current liabilities in the pension remain.

Unless there is some kind of economic miracle between now and June 30, the surplus will not be $3 billion. However, a little money invested now can yield large savings in the future. Even using a 4 percent discount rate, a $100 million investment today will be worth more than three times as much in 30 years. It is the same principle as putting a larger down payment on a house. The larger up-front payment will mean lower total spending on the mortgage as a whole. That is a savings for future taxpayers.

A state surplus would be a good thing, but the state has an obligation to use any surplus responsibly. Helping to make sure our pensions are funded is a worthy goal and one worth pursuing.

The post Better Bottom-Line Fuels Budget Battle appeared first on Show-Me Institute.

Findlay’s analogy was in response to a recent Show-Me Institute paper on Missouri’s unfunded pension liabilities. The author of the policy study, Andrew Biggs, demonstrates that Missouri’s unfunded pension liabilities are much higher than the state has reported when we accurately account for the risk of the investments.

Biggs, on the Show-Me Daily blog, and Jason Richwine, of the Heritage Foundation, have criticized Findlay’s remarks. In his post, Richwine states: “From an economist’s perspective on costs, Findlay is free to pursue whatever level of risk he wants with the Missouri pension fund. What he cannot do is pretend that more risk comes at no cost to the state’s taxpayers, who must make up for any funding shortfalls.”

I cannot help but heap more criticism on Findlay. His analogy would be accurate if Biggs had suggested we take a zero-risk approach to pensions by banning pensions. Of course, that is not what he suggests. Rather, Biggs argues that pension liabilities should be calculated with a low-risk discount rate. In non-economist speak, that means when you are gambling with taxpayer money, it is wise to hedge your bets.

If we want to stick with the car theme, a better analogy would be that calculating pension liabilities with a low-risk discount rate is akin to purchasing auto insurance. Like driving, our investments have risks embedded in them. I believe it is important for Missourians to adequately plan for that risk before we let our unfunded liabilities come back to rear-end us. (How is that for a car analogy?)

The post Unfunded Pension Liabilities And Car Analogies appeared first on Show-Me Institute.

The St. Louis Post-Dispatch’s David Nicklaus brought these results to Gary Findlay, executive director of the Missouri State Employees Retirement System (MOSERS) and an outspoken opponent of fair market valuation. “Using a risk-free discount rate, Findlay says, is about as sensible as arguing that the state should take a zero-risk approach to traffic accidents — by banning cars.”

In fact, fair market valuation does not say that pensions cannot take investment risk. Nor does it argue that investment risk cannot pay off. Rather, it merely says that we cannot assume that investments always pay off and ignore the risks those investments pose to the budget and the taxpayer. Under current pension accounting rules, a plan that takes more investment risk — say, by shifting into stocks, private equity, or hedge funds — automatically becomes “better funded” because the plan then assumes a higher investment return. But high-risk investments do not make pensions better funded. Yes, they reduce contributions for current taxpayers — but shift an equal and opposite contingent liability onto future generations to pay full benefits should the assumed rates of return fail to materialize.

And, as recent experience has shown, riskier investments do not always pay off, even over the long run. In fact, MOSERS’s own investment consultants told them that the plan has a less than 50 percent chance of achieving its stated returns. But full benefits must be paid 100 percent of the time. Fair market valuation catches the cost of guaranteeing full benefits. Current accounting standards ignore it.

Findlay’s traffic accident analogy is not the most apt, but think about it this way: Automobiles come with obvious benefits but also costs, including the risk of traffic accidents. But we cannot weigh the costs and benefits if we refuse to count the number of accidents each year. Similarly, we cannot refuse to consider the possibility that our bets on high-risk pension investments will not pay off, particularly when billions of taxpayer dollars are on the line.

The post Valuing Public Employee Pension Liabilities: Nothing ‘Fair’ About It appeared first on Show-Me Institute.

Unfortunately, in many cases, the financial situation of these pensions is worse than the Pew report indicates. The 77 percent figure comes from an aggregation of several pensions. Individually, many pensions have funding ratios below 77 percent. In 2011, the Missouri State Employees’ Plan (MSEP) had a funding ratio of 79.2 percent, but the Missouri Department of Transportation and Highway Patrol Employees’ Retirement System (MPERS) had a funding ratio of 43.3 percent.

To make matters worse, the state’s monetary contributions to some of these plans is below what is required to keep up with the plans’ new obligations (this includes interest on obligations, which in the case of MSEP, is not fully funded). Thus, in many cases, the financial situation of these pension plans is getting worse, not better.

The Missouri Legislature has taken steps to deal with the pension shortfall. The state raised the retirement age to 67 from 62, along with requiring the workers to contribute 4 percent of their pay toward their pension benefits. Given the current financial situation of some of these pensions, I would suggest an additional common sense change.

The state should index the retirement age to life expectancy. Thus, as life expectancy increases, the retirement age would increase along with it so that the entire plan would be on firmer financial footing. This would not be the only change that could be made, but it would be a rather simple one to accomplish.

The post The Missouri Pension Problem appeared first on Show-Me Institute.

Begin by thinking of a pension fund as a pool of investments (like stocks, bonds, etc.) that are purchased from money that employers contribute. These contributions and investments hopefully grow enough over time to cover the future retirement benefits of retired employees. But when employers fail to remit sufficient contributions, and when investments do not grow fast enough, the amounts of money available to pay retirement benefits fall short of the promised benefits. When this occurs, you have an unfunded liability. And because we are discussing public pension funds (where the government is the employer) future taxpayers are on the hook for the unfunded liability. And a looming fiscal crisis ensues.

We have reviewed the most recent comprehensive annual financial reports of five large statewide public pension funds in Missouri. The unfunded liabilities of each are listed below:

Missouri State Employees Retirement System (MOSERS): $2.4 billion

Missouri Local Government Employees Retirement System (MOLAGERS): $900 million

Public School Retirement System (PSRS): $5 billion

Public Education Employee Retirement System (PEERS): $500 million

County Employees Retirement Fund (CERF): $130 million

That is a total of just under $9 billion in unfunded liabilities that we owe to current and future public retirees! That is $1,500 per man, woman, and child in Missouri. And this includes only five public pensions (while these are among the largest public pensions in Missouri, there are approximately 130 public funds at the local and state level). This debt exceeds Missouri’s total general revenue collections for fiscal year 2011 ($7.1 billion, see the table on page 10 of the governor’s fiscal year 2013 executive budget). Taxpayer, beware. How many of the remaining 125 pensions operate in the red and how much do we really owe after they are accounted for?

Now, of course, if the economy and stock markets recover, the picture improves somewhat. But not by as much as you may suppose. Stay tuned for further discussions on that point.

The post A Steaming Pile of Pension Debt appeared first on Show-Me Institute.

But last summer, legislators revamped the system for new employees — those hired after Jan. 1. They will have to chip in 4 percent of their pay and work longer to draw pensions.

Without those changes, the state’s cost would have gone up by about $20 million next year, officials said.

This is a very good move for Missouri taxpayers. The old world, in which public employees gathered generous pensions without any contributions themselves, is clearly not sustainable. I would like to go further and eliminate public pensions for non-uniformed public employees and move toward defined contribution plans entirely — including a government match. I also think that it is perfectly reasonable to require those already enrolled in the old system to contribute going forward, without losing any of the benefits they had already gained.

I would support maintaining some of the defined benefit plans for the uniformed employees who put their lives on the line for us, but even in those cases I think a required employee contribution is fair. The many issues associated with government pension plans were discussed in depth in this Missouri pension study released by the Show-Me Institute in 2008. As the author, Richard Dreyfuss, asked then:

If certain employee benefit provisions are considered obsolete or unaffordable in the private sector, how can such costs be considered affordable and commonplace in the public sector?

The incremental changes made earlier this year by state government will have an excellent, long-term impact for state taxpayers.

Full disclosure: The author of this post, aka moi, has a pension from his time working for St. Louis County government (2001–2007) — and, no, he was not required to contribute to it.

The post Positive Pension Changes for Missouri appeared first on Show-Me Institute.

As pointed out in the article, the entire market was down during this period, and the MOSERS staff lost less than the average investor, percentage-wise. It would be difficult to independently check the numbers, but — if true — this is certainly a good reason to give bonuses. The relevant thing to consider is that it is difficult to maintain positive gains in such a losing market, and that if the folks at MOSERS hadn’t invested the way they did, the fund would have lost MORE money than it did.

Here’s a tortured analogy: Suppose that all the investment personnel are engaged in a ditch-digging contest, and the deeper their ditches, the better off they are. Every day, the ditches grow deeper. However, because of a general lack of foresight and some misguided government policies, the dirt removed from each ditch is stored right next to the ditches. One day, there’s an earthquake that fills in a large portion of everyone’s ditches, and everyone’s long, arduous work seems undone. Because of one digger’s foresight and good practice, however, the earthquake filled the MOSERS ditch with much less dirt than everyone else’s holes. That ditch is worse off than it had been before the earthquake, but thanks to the employee’s efforts, it’s not as bad as everyone else’s ditches. Should this employee be rewarded or punished?

Again, I haven’t run the numbers myself, but from what I’ve heard and read, this loss does not bode well for an already underfunded system. We needn’t blame the managers for this particular loss, but this is a good time to pay attention to Missouri’s public pension systems. Check out the Show-Me Institute’s recent study for more information.

The post Not Gaining More, Losing Less appeared first on Show-Me Institute.