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.

The post Policy Solutions for Missouri’s Government Employee Pensions 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.

The St. Louis Post Dispatch reports “Missouri mulling pension payouts for some former state workers.” Meanwhile, the Springfield News-Leader writes “Troubled Missouri pension system offers buyouts to former state employees.” In the PD piece, State Treasurer Eric Schmitt, who is also on the MOSERS board of directors, is quoted as saying, “Now is the time to start taking our pension troubles seriously. If we don’t, it will mean less resources for our schools, roads, and health services down the line.”

The buyout for MOSERS employees would provide a lump sum payment, rather than collect pension benefits down the road. The buyout is worth less than the actuarially assumed pension benefits the workers would stand to receive; thus it would generate a savings for MOSERS and it could potentially help some workers.

The treasurer is right. We cannot keep kicking pension problems down the road and this buyout is a smart, common sense strategy for reducing pension obligations. Smart, that is, for the state. Whether it is smart for the workers to take it is another story. Andrew Biggs doesn’t think so. Check out this Twitter interaction between, Biggs, Mizzou economics professor Cory Koedel, and me. 

Biggs suggests MOSERS pensioners shouldn’t take the deal. Koedel and I offer responses in jest, as Missouri taxpayers we stand to benefit from MOSERS shoring up its bottom line. Then Biggs offers a startling calculation. He suggests the buyout is worth approximately 39% of the value of the worker’s benefits. I doubt that’s actually worse than the odds on a lottery ticket, but it is certainly not a good payout.

Does this mean no one should take the buyout? Not necessarily. There may be circumstances in which some workers might be interested in having a lump sum of money rather than a pension that pays out over a course of 30 plus years. For instance, if you don’t expect to live that long!

The most important thing here is for workers to be educated on this option. With that said, I commend the MOSERS board for exploring this option and encourage MOSERS workers to fully understand their options before making any decisions. 

The post MOSERS Pension Buyout Good for Taxpayers, Probably Not for All Workers 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.

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.

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.

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.

Last week, the board of the Missouri State Employees Retirement System approved a 20 percent increase (from $274 million to $330 million) in pension costs to the state. This increase will go into effect next year. Missouri will either have to cut funding in other areas to fit this into the budget, or increase taxes.

Tax money and investment income provide a majority of the state pension system’s funding. Forecasted investment growth rates have been too high, especially during the recent economic downturn. This means that there have been unrealistic high expectations of the amount of investment income the pension plans would receive. Now, taxpayers are stuck with the bill to make up for lower than anticipated investment income.

The $330 million cost to Missouri is a clear sign that further reform to the state pension system is needed.

The post Yes, Missouri Taxpayers Will Bail Out Public Pensions 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.

City Manager Troy Schulte was appropriately blunt recently discussing Kansas City’s troubled pension system. He proposed good changes that could affect thousands of current and future city employees, while saving taxpayer dollars along the way.

“I don’t think our pension system is sustainable in the current structure,” Schulte told [the Pension System Task Force] evaluating the city’s retirement programs. The panel, which meets again today, should pay close attention to his recommendations.

The Task Force is presently comparing its systems (police, firefighters, and city employee systems) to those of a peer group of eight cities, including Oklahoma City, Denver, and Minneapolis.  And what are some of the preliminary findings? First, Kansas City taxpayers contribute an amount equal to 12.88 percent of a civilian employee’s salary towards his/her pension plan. This contribution rate is greater than rates in each of the peer group cities.

Second, the cost of living adjustment for retirees is three percent per year, higher than six of eight peer cities. Finally, the two percent per year multiplier is greater than those in seven of eight peer cities. Thus, retirees with 30 years of service receive 60 percent of their final average pay upon retirement.  In Indianapolis, by comparison, a retiree would only be entitled to 30 percent, based on a one percent per year multiplier.

While Kansas City’s self-analysis is fine so far as it goes, greater Missouri has approximately 130 government employee pension programs, ranging in size from the gargantuan Missouri State Employees’ Retirement System to the relatively miniscule Antonia Fire Protection District Pension Plan.  That’s right, 130!

Perhaps Kansas City is not alone, as the entire state of Missouri could be sitting on a pension time bomb.

Because public pensions are largely funded by Missouri taxpayers, taxpayers and their elected representatives need to address numerous issues in an open forum.  For example, are present and future liabilities underfunded, and if so by how much? Will future shortfalls be funded in the form of taxpayer legacy costs (i.e., future tax increases), by increased employee contributions, or by some combination of both? Should we begin now to require government employees to contribute to their pensions from current wages, thus tamping the insatiable demand for increased future benefits that arises when pension beneficiaries are not required to bear the costs? Have the managers of these pension funds reasonably estimated future portfolio returns, thus assuring that today’s contributions adequately support tomorrow’s payouts?

One may easily imagine a host of further questions that need to be asked.  That dialogue should occur soon, before time runs out.

The post Kansas City: Grabbing the Pension Bull by the Horns? appeared first on Show-Me Institute.

Nearly 40 local and statewide pension systems for public employees are underfunded, according to a report submitted on Tuesday to the Missouri legislature’s Joint Committee on Public Employee Retirement (JCPER). The report is a detailed “watch list” that focuses on pension programs that have less than 70 percent of outstanding obligations (payments to retired employees) available.

The number of public pensions that fall below the committee’s threshold more than doubled this year, from 19 in 2008 to 39 in 2009, said JCPER Executive Director Ronda Stegmann. Three statewide pension plans appeared for the first time on the committee’s watch list:

• The Missouri State Employee Retirement System (MOSERS), the pension fund for most state employees, including elected officials, is funded at 66 percent, with an investment loss of 19.32 percent
• The Public Education Employee Retirement System (PEERS), the pension fund for non-certificated public school employees, is funded at 61 percent, with an investment loss of 19.1 percent
• The Public School Retirement System of Missouri (PSRS), the pension fund for public school teachers and other certified school employees, is funded at 60 percent, with an investment loss of 19.55 percent

Despite the dire numbers, the committee’s watch list may just be that. While some critics have suggested in the past that public pensions are suffering because plans promise a defined set of benefits instead of taking in a defined set of contributions and doling out the earnings to retirees, the committee blamed the across-the-board losses to the current economic recession.

“Does inclusion on the watch list automatically mean that the benefit structure should be changed in some way?” asked Patricia Yaeger (D-Saint Louis).

“No,” Stegmann replied. “We certainly are not suggesting any impropriety.”

Some committee members even suggested that the funds may have bounced back a bit recently.

Committee Chairman Ward Franz (R-West Plains) said that his own retirement fund increased in value by about 18 percent during the last quarter, and asked whether that could be the case for some of the public pension plans.

“I believe that many of the plans have received double-digit investment growth,” Stegmann said.

The committee’s report, available for the first time online, can be read here.

The post Committee Reports 39 Public Pensions Underfunded appeared first on Show-Me Institute.

The Missouri State Employees’ Retirement System invested $25 million in half the equity portion of the BlackRock Senior Income Series 2006 collateralized loan obligation, managed by New York-based BlackRock Inc. Moody’s last month cut ratings on parts of the debt, saying a drop in value of the underlying collateral may cause “an event of default.”

Chris Rackers, the manager of investment policy and communication for the Missouri fund, didn’t return calls seeking comment.

This seems somewhat frightening. It also seems a good opportunity to plug our recent study of Missouri’s pension funds by the other Richard Dreyfuss.

The post A Very Interesting Tidbit About MOSERS Over at Bloomberg.com appeared first on Show-Me Institute.