This isn’t that complicated. The new St. Louis city fireman’s pension board was created because the old one was dominated by union interests who made it incredibly generous for firemen and civilian employees of the department. One of those civilian employees received a half-million-dollar (!!!) cash payout upon her retirement, on top of her generous pension. As this recent Post-Dispatch story explains, the union trustees on the new board have implemented draconian changes to the pension funds, things such as cancelling the annual pension board training trip to Key West. Cue the outrage; from the Post story:

Paul Payne, the city’s budget director, said going to an industry conference in South Florida looked less like education than vacation. And he told Kenny Mitchell, a firefighter trustee who wanted to go, just that.

Meeting minutes relay what happened next: “Trustee Mitchell responded to Trustee Payne with a profane remark.”

I’ve been to Key West many times. It is uniquely wonderful for many things. Pension board training is not one of them.

The St. Louis Board of Aldermen just passed, once again, a bill to return the pension plan to the control of the fireman’s union instead of the new city board that runs it for the benefit of both firemen and taxpayers. That means having a pension system that pays fireman what they deserve, but also considers the interests of the taxpayers at the same time. It doesn’t mean pension training trip to Key West, nor does it mean half-million-dollar cash payouts on top of the pensions. What does St. Louis City’s budget director think it means?

The [proposed] move will consolidate pension oversight under a firefighter-run board that spent double what a city-run panel paid for administration last year. And Budget Director Paul Payne says it would be a first step toward taking the pension system back to where it was a decade ago, when years of rubber-stamping benefit increases led to a budget crisis and forced painful cuts.

“Their history,” Payne said of the firefighters, “is not one of saving money.”

Mayor Jones has vetoed the legislation, just as Mayor Krewson vetoed it previously, and as Mayor Slay would likely recommend after having spent considerable time, effort, and political capital during his term making these necessary reforms in the first place. Good for Mayor Jones. Pension funds should be run for the benefit of those government employees promised good benefits in accordance with the overall fiscal health of the city and its taxpayers, not just one of them.

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https://showmeinstitute.org/publication/public-pensions/missouris-teacher-pension-system-unfair

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

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

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

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

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

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

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

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Some may look at this not as an indictment of our pension plans, but on how “little” we spend on higher education. Indeed, a few months ago, I sat in a meeting trying to figure out how the College of Education at the University of Missouri–St. Louis could cut costs. As the St. Louis Post-Dispatch has reported, the university is facing a serious budget crunch. While I examined the figures with a group of colleagues, one professor suggested that the real problem was declining state aid for higher education.

But let’s say we want to spend more on higher education. Where does that money come from? It doesn’t get created out of thin air. Given Missouri’s anemic economic growth, the available pie of state funds isn’t getting any larger. Any new funds for education will likely come either from another program or from taxpayers. The same can be said of rising pension costs. As we spend more on pensions, we will either have to cut back on funding to higher education and other services or we will have to take more from taxpayers. There is no magic third option; someone has to pay the piper.

As the Show-me Institute has highlighted many times, Missouri’s pension plans are a “looming crisis.” In a 2015 Show-Me Institute Policy Study, Andrew Biggs wrote:

Using standard actuarial valuation, Missouri plans are, on average, 78 percent funded and unfunded liabilities are slightly below $17 billion. Using a fair market approach, funding ratios lie between 41 and 52 percent and unfunded liabilities total from $57 to $89 billion.

In other words, our current obligations far surpass how much we have set aside in pension funds.

Unless Missouri changes how we structure our pension systems, we can expect our obligations to pension funds to grow. This will continue to put pressure on the state budget and will continue to divert spending from other government programs, such as higher education.

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The problem our home inspection revealed was below the surface. It wasn’t causing any noticeable problems today. Down the road, however, it could have caused a fire, resulting in irreparable harm.

Recently, Michael Rathbone and I performed an inspection of our own—not on a home, but on Missouri’s teacher pension systems. Similar to my home inspection, we found something troubling just below the surface. Missouri’s teacher pension systems have shifted to riskier assets. This shift has not caused any noticeable problems as of today; and like my reversed polarity, may not ever cause any harm. Of course, an increase in risky assets also increases the possibility that the house could burn down.

Imagine if upon receiving my home inspection, I had yelled at the inspector, “You just hate houses!” As ridiculous as that might seem, that is exactly the reaction Michael and I have received. In response to a recent op-ed in the Springfield News-Leader, in which we called for increased transparency so that the problem could be monitored, we were vilified. One pensioner even claimed that we dislike public education. The author of the response to our op-ed then went on to list several facts that were not germane to the point we made.

Somehow it seems our message has been lost. Therefore, I want to reiterate the point of our paper, “Betting on the Big Returns: How Missouri’s Teacher Pension Plans Have Shifted to Riskier Assets,” one more time. Missouri’s pension investments are becoming more risky. In other words, the house isn’t on fire, but it is becoming more flammable. It would be wise to monitor the investments more closely and plan for these increased risks. 

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Most recently, Michael Rathbone and I pointed out that Missouri’s teacher pension systems have shifted to riskier assets. From this study, we concluded that lawmakers “should be aware that these pension plan returns are based on increasingly risky assets and acknowledge that fact when planning for the future.” In particular, we suggested that the plans should forecast assets based on various expected rates of return.

On August 7, PSRS Executive Director M. Steve Yoakum issued a three-page response to the paper. Mr. Yoakum claims that our study “provides a limited and somewhat biased view of PSRS/PEERS and the Systems investment strategy,” but in the rest of his response he acknowledges several of the points we made.

Mr. Yoakum acknowledges the shift away from fixed-income investments and toward higher-risk investments, and goes on to justify this shift by citing lower returns on the former and greater opportunities “in other areas of the investment universe.” This is essentially the point we were making: equities and alternative investments have historically delivered higher returns than fixed-income investments, but they also carry greater risk.

Our paper states that current teacher and school district contributions do not cover the existing obligations, meaning that pension plans must rely on investment returns in order to meet their obligations to members. Mr. Yoakum’s response: “Only if we exclude income from investments is this true.” It is difficult to describe this as anything but a restatement of our point.

We stated, and Mr. Yoakum’s response acknowledges, that public employee pension systems have moved toward riskier assets than they held in the past. Much of Mr. Yoakum’s response is devoted to explaining this change—which is important— but the point of our paper was not to question the reasons behind the shift. Our goals were instead to document this trend and to endorse the recommendations of the Pew report that we cited repeatedly in our own study, namely that “Government sponsors can demand better reporting of future expected costs and the associated downside risks, and then use this information to make decisions about ways to deal with poor outcomes, should they occur.”

We remain committed to these recommendations, and we stand behind every word in our study. 

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This common proverb argues that one cannot expect to achieve anything without taking some risk. The amount of risk one is comfortable with differs from person to person. However, if the thing at risk is the retirement savings of thousands of public school teachers, it would be wise that managers of these teachers’ money take as few risks as possible.

Unfortunately, these managers are going in the opposite direction and placing riskier and riskier bets in order to finance teacher pension obligations. As my colleague James Shuls and I point out in our new essay, “Betting on the Big Returns: How Missouri Teacher Pension Plans Have Shifted to Riskier Assets,” each of Missouri’s public teacher pension plans have moved away from investing in safer assets such as fixed-income securities and toward riskier investments such as equities and various alternative assets.

As we state in the paper, more risk isn’t inherently a bad thing since investors are compensated for that risk with higher returns. Still, what will happen to taxpayers if some of these risky assets fail to deliver as expected? James and I cover this and more in our paper, so please give it a look.

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Last year, the Show-Me Institute released a report by Dr. Andrew Biggs of the American Enterprise Institute. The report showed how Missouri public pension plans are underestimating the total amount of unfunded liabilities (total pension obligations that exceed the amount of assets the pension plan has) that they have. In fact, using more realistic assumptions, five of the state’s largest pensions have unfunded liabilities FIVE TIMES larger than what is reported ($54 billion actual vs $11 billion reported). That is a serious amount of money, and if these pensions do not have the assets to cover their obligations, then the taxpayer (you and me) will be left footing the bill.

State Budget Solutions, to my knowledge, does not have the gift of prophecy either. Yet they see what we see when they look at the status of state public pensions. Their new report discusses the unfunded liabilities of every state’s pension system. The content of the report sounds familiar because, like Dr. Biggs, they find that using more realistic assumptions about plan returns, state public pensions are significantly underfunded. According to State Budget Solutions, Missouri’s pensions aren’t among the worst nationally. That doesn’t mean things are good and the state’s pensions don’t need reform. If I’m stuck holding a stick of dynamite, while my neighbor is holding an atomic bomb, it doesn’t mean I’m going to be okay when the dynamite goes off.

Unfortunately, there has been little progress into actually achieving pension reform in Missouri. At the very least, the state needs to work to stop additional liabilities from being added to the already enormous amount the state already owes. Shifting to a defined contribution plan or a cash balance plan would be a good place to start. Then, policymakers can work on addressing the gap between pension assets and the monies these plans owe.

Cassandra warned of danger, and she was not believed. That was her curse. Hopefully, Missouri can avoid Troy’s fate.

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The goal of public employee pensions is twofold: to provide a safe and secure retirement for our valued state employees and to help recruit and retain talented individuals into public service careers. Unfortunately, many of Missouri’s public employee pension systems have flaws that make it difficult to achieve either of these tasks.

Moreover, these pension plans put taxpayers on the hook if and when they become unfunded. The Show-Me Institute consistently points to the flaws in these systems and has recommended that the state transition to plans that are structured in a more effective and efficient manner. This would require closing some of our current pension plans. Some opponents of this idea worry that closing our current plans would not save the state money; rather, they say it would be more risky and would result in high transition costs. This is the topic addressed in our policy study “Missouri Transition Costs and Public Pension Reform,” by Andrew Biggs, Ph.D, resident scholar at the American Enterprise Institute.

Read the full policy briefing: 

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Closing defined benefit plans reduces or prevents the accumulation of additional unfunded liabilities. There are many reasons elected officials may favor or oppose shifting public employees out of traditional defined benefit pensions into cash balance or defined contribution plans. But concerns over so-called “transition costs” are largely mistaken and should not stand in the way of public employee pension reforms.

Read the full policy study: .

Read the full policy briefing: .

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The reason for the large discrepancy between Biggs’ numbers and those of the state’s pensions is the discount rate. A discount rate is basically compound interest working in reverse. If, for instance, I owed someone $10,000 five years from now, the discount rate tells me how much I would need to invest to ensure I can make that payment. The higher the rate, the lower the amount I need to invest.

The state’s public pension plans use discount rates between 7.25-8.25 percent. This enables them to assume their current assets will be worth more in order to pay off their liabilities. Biggs uses a lower rate that better accounts for the risks inherent in a portfolio with risky assets and guaranteed liabilities.

We, as taxpayers, are responsible for these obligations. If the state does not have enough money in these pensions to make the necessary payments to beneficiaries, it will have to resort to massive tax increases and/or deep cuts to services. The first thing the state should do to prevent this from happening is shift our public pensions to a defined contribution plan. This would prevent any new liabilities from accruing and give the state breathing room so that it can deal with its existing liabilities.

Missouri’s public pensions might appear to be relatively healthy to the casual observer. However, there is something rotten in the state of Missouri. Its public pensions are seriously underfunded and changes need to be made today. We cannot afford to wait.

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These pension plans have come under increased scrutiny as funding levels have dropped and required contributions have risen. According to standard actuarial accounting, the average public pension funding fell to about 75 percent in 2011, versus 103 percent in 2000. The Annual Required Contributions that state and local governments make to public pensions have more than doubled in nominal terms since 2001, a period in which prices rose by only about 25 percent. Public sector pensions, as of mid-2011, were underfunded by approximately $885 billion, based on accounting rules that the Governmental Accounting Standards Board established and applied to a large sample of plans from the Public Plans Database.

A similar pattern holds for the Missouri public employee pensions, which serve state and local government employees. Annual required contributions have risen and measured funding health has declined. Most Missouri public employees participate in one of five retirement plans . . .

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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.

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Kansas City recently began investigating its pension systems. You may access our previous coverage here and here. Recently, outside consultants to its Pension System Task Force recommended that taxpayers pony up an additional $23 million per year “to make the city’s pension funds more financially stable.” Apparently, the city may now make current and future taxpayers pay for the sins of prior administrations. They are passing the buck onto future generations of taxpayers and their children.

Perhaps greater Missouri should pay heed. According to the Cato Institute’s recent work, Missouri’s public pension plans are grossly under-funded when accounting for reasonable expectations of future economic conditions. Think about the impact this may have on the tens of thousands of state employees and retirees and their families, if and when they are unable to support themselves on their broken pensions. They deserve better. Taxpayers have reason for concern as well. Ultimately, the state loses credibility when it breaks its promises. And under that scenario, everyone is a loser.

Kansas City and Missouri are far from alone. WLBT TV-3 out of Jackson, Mississippi, reports that the state pension fund, the Public Employees Retirement System (PERS), is now guided by a 12-member commission. The commission is empowered to:

…examine the financial, management and investment structures as well as determining the legality of modifying the system. All in an effort to dodge a potential problem in the long run.

Mississippi Gov. Haley Barbour notes that PERS is funded at only 60 percent of where it should be and pays out benefits that exceed its structural limits. Kudos to Mississippi for beginning the discussion on sustainability and reform.

Fortunately, some of our sister states have gone pro-active, confronting the looming crisis. The Center for State & Local Government Excellence has just released a study of five successful pension reforms in Iowa; Oregon; Vermont; Gwinnett County, Georgia; and Houston, Texas. Although not perfect, these reform efforts provide some hope that pension stakeholders can meet and iron out their differences. Here’s hoping that Missouri joins the party before midnight strikes. Better late to the party than dead broke on the outside looking in.

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