Last week, I submitted testimony on House Bill (HB) 1511, which would protect St. Louis–area business owners from being forced to install, operate, and maintain electric vehicle (EV) charging stations on their own dime. The legislation would not prevent mandates for the installation of EV chargers. However, it would require St. Louis–area governments to pay for their mandates. You can read the full testimony here.

HB 1511 was filed because some St. Louis municipalities (the City of St. Louis and Brentwood, among others) are forcing business owners to install and operate EV chargers (on their own dime) following new construction or significant renovation. There are a few reasons why such mandates are a bad idea.

Remember when people thought MySpace was the future? It is possible (although I think not likely) that EVs could suffer a similar fate.

Fully electric vehicles are only 1% of the cars on the road.

Governments are assuming that the EVs of the present are also the vehicles of the future. A new type of electric vehicle could emerge (like when Facebook surpassed MySpace) and make premature government investment unnecessary. A whole new technology like hydrogen-fuel cells could emerge as the best way to power our transit in the future.

Additionally, EV chargers that are currently on the market are in their early stages. The typical public charger used in cities (also known as a Level 2 charger) takes 4–10 hours to charge an EV from empty to 80%. As charging technology improves, faster options will hopefully become available. Will there need to be a mandate for new construction each time the technology improves?

As EVs make up a bigger share of cars on the road, and as developers hopefully improve charging speeds, establishments such as apartments, hotels, and restaurants will likely seek to lure this growing consumer base with EV chargers. There is no need to force any business to build charging stations that cost $2,000–$5,000

As of right now, public chargers are rarely used. The market can grow at its own pace. I see gas stations everywhere, but I do not fill up all the time. I usually fill up when I am nearing empty and it is convenient for me. EV owners typically follow a similar pattern, as over 90% charge their car at home daily (55%) or weekly (38%).

According to a 2023 survey:

• Only 4% of EV owners report using a Level 2 public charger daily.
• Approximately 14% of EV owners report using one weekly.
• Approximately 16% use one monthly.
• Approximately 46% say they “rarely” use a public charger.
• Approximately 21% say they have never used one.

It’s possible that plug-in electric chargers will never be popular.

The current legislation is restricted only to the City of St. Louis and St. Louis County. But why is it so limited? Unfunded mandates for EV chargers are bad policy wherever they are in the state.

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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. 

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Whether it is the Missouri Retired Teachers Association, MNEA-retired, or the director of The Public School Retirement System, breathless commentary argues over and over that we have some desire to destroy teachers’ pensions. 

I don’t take this personally. As Jay-Z says in classic song December 4th, “This is the life I chose, not the life that chose me.” But teachers in Missouri probably should. The stability of their retirement depends on it.

And that brings us to a recent article written by Chad Aldeman and Kelly Robson of Bellwether Education Partners. The refrain is one that should be familiar to readers of this blog. Many, many teachers are net losers in current pension systems.

The Missouri-specific numbers show that only 58% of Missouri teachers will “vest” in the pension system.  Only 38% will “break even” in the system, meaning that 62% will pay more into the system than they will get out of it.

These are not my numbers. These are not Show-Me Institute numbers. These are numbers collected and analyzed by a third-party organization and published in a reputable journal house at arguably the most prestigious university in our nation.

Combine this with the fact that poorer districts subsidize pensions in wealthier districts, pension funds are taking on riskier and riskier investments to chase higher returns, pension plans have huge unfunded liabilities, and that reformed pension systems can be beneficial to teachers (more evidence here) and then ask yourself: Who are the villains again?

At some point cheap theatrics and ad hominem arguments aren’t going to cut the mustard anymore, and someone will have to answer to the facts: More than 40 percent of teachers fail to vest in the system (losing everything that the state has contributed), and more than two-thirds are net losers in the system. 

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With that statement, Missouri State Treasurer Eric Schmitt described our state’s severe underfunding of public employee retirement plans. To put an issue that Show-Me Institute writers have been highlighting for years in simple terms, when initial contributions to a retirement plan are too low or don’t grow as fast as projected, spending promises can’t be kept. Either retirees are hung out to dry, or taxpayers must step up and pay what a plan cannot.

Addressing our current spending issues is essential to improving our state’s fiscal health, but if we fail to consider Missouri’s long-term pension obligations the results could be disastrous.

As any savvy investor knows, the power of compounding can make a huge difference when it comes to saving. If our investment assumptions today are even slightly different from what actually happens in the market, this difference can grow rapidly over time. A widening gap between assumed and actual returns is especially troubling, because most economists agree that estimates for pension investment returns are often too rosy.

In 2015, Andrew Biggs of the American Enterprise Institute estimated that Missouri’s public pension plans had a total of $57.3 billion in unfunded liabilities (which are calculated as current assets minus the net present value of what will need to be paid). If plan investments fail to grow enough to cover promised benefits, then a bill much larger than even $57.3 billion will hang over the budget discussions Missourians have years from now.

So how can we fix this problem? Reforms that help Missouri transition away from plans that promise payments for life and toward plans that incur their costs up front can protect our state from investment risks. Schmitt illustrates this perfectly when he says “Our goal as a state should be to fully fund our obligations as they are incurred instead of putting the burden on the backs of our children and grandchildren.” Policymakers should consider adopting this goal—the sooner, the better. 

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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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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.

The post Missouri’s Pension System Must Change appeared first on Show-Me Institute.

Many municipal leaders in Saint Louis County are opposed to SB 5, especially those officials from cities who heavily rely on fines (traffic and otherwise) for revenue. They sued the state over SB 5, claiming the provisions limiting Saint Louis County’s municipalities’ ability to collect fines and fees to 12.5% of general revenue constituted a “special law,” because elsewhere in the state the limit is 20%. Despite the fact that laws tailored to individual counties are passed all the time (think the provisions restricting floodplain tax incentives in only Saint Charles County) the judge in this case found SB 5’s fine limits unconstitutional. The judge also ruled that law’s reporting requirements and policing standards were unfunded mandates, and thus also unconstitutional. For all intents and purposes, much of SB 5 is gutted.

This is a disappointing outcome for those hoping that the state’s actions last year might rein in those small cities keeping themselves afloat by turning law enforcement into tax collection. On a hopeful note, the state plans to appeal, and the governor indicated a willingness to work with the legislature on a bill that will pass constitutional muster. 

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If the lovable bear Winnie the Pooh has a downside, it is his insatiable desire for the sweet taste of honey. Time and again, his uncontrollable urge has ended with him getting his head stuck in the honey pot and needing to be bailed out by his friends. In many ways, Missouri lawmakers have encouraged the same kind of foolishness, continually sweetening the pension pot for public school teachers. If they do not change course — and soon — they will put future lawmakers into an impossible situation where they are forced to call on their friends — the taxpayers — for a major bailout.

Sweetening the pension honey pot for public employees is a very tempting proposition. Indeed, for lawmakers, there is almost no down side because pension promises often are not realized for many years. By improving pension benefits, politicians can please many voters with promises that they do not have to keep. These pension enhancements, however, are not free.

In a new Show-Me Institute case study, Robert Costrell, professor of education reform and economics at the University of Arkansas, detailed the impact of pension enhancements to Missouri’s largest pension system, the Public School Retirement System (PSRS). “Missouri repeatedly and considerably enhanced its pension benefit formula from 1975 to 2001, resulting in large increases in pension wealth, particularly for those retiring in their 50s with 25-30 years of service,” Costrell wrote.

Three essential numbers are used to calculate a teacher’s pension payment from PSRS: years of service, final average salary and a multiplier that allows PSRS to calculate reduced early retirement benefits. Lawmakers can sweeten the pension pot by inflating final average salary calculations, increasing the multiplier or allowing individuals to retire earlier without penalty. Over the past few decades, Missouri lawmakers have employed each of these tactics.

Costrell noted that in 1977, a teacher could retire with his or her full benefits at 55 with 30 years of service. In 1986, the benefit multiplier was increased from 2 percent to 2.1 percent; in 1991, full benefits were granted with 25 years of service; in 1994, the multiplier increased to 2.3 percent; in 1996, lawmakers added insurance benefits into the final average salary calculations; in 1998, they increased the multiplier to the current 2.5 percent; in 1999, they instituted a “Rule of 80,” which allows a teacher to retire with full benefits when his or her age plus experience equals 80. That same year, lawmakers reduced the years used for the final average salary calculation from five to three, a move that increased the final average salary of all retirees.

With all of these enhancements, a teacher in Jefferson City can now retire in his or her early 50s after 30 years in the classroom with a pension that is approximately the equivalent of a lump sum payment of $950,000. That is, the “cash value” of the pension at the time of retirement is close to $1 million.

To keep pace with the pension enhancements, the contribution rate for teachers and their public school employers has increased dramatically from a combined 16 percent in 1975 to 29 percent today. Even with these increases, PSRS has not been able to keep pace with the promised benefits. If we assume a 4 percent return on investment, PSRS has more than $31 billion in unfunded liabilities.

If they are as simple-minded as ol’ Pooh, policymakers might think they are helping create a secure retirement system for teachers when they enact these pension enhancements. But they are really making promises that they (or future lawmakers) cannot keep. If they want to create a secure retirement system for current and future public school teachers, they do not need further enhancements; rather, they should enact fundamental pension reform.

James V. Shuls, Ph.D., is the director of education policy at the Show-Me Institute, which promotes market solutions for Missouri public policy.

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An interesting point raised in the report was that, “…the discount rate used in the valuation of liabilities should be a low-risk rate, ideally as low as the rate on Treasury bonds.” In a Show-Me Institute Policy Study, Andrew Biggs also urged state pensions to use a low-discount rate in valuing their liabilities (the discount rate is the interest rate that pension plans use to translate future liabilities into current dollars). It’s encouraging to know that other institutes are reaching similar conclusions.

However, it isn’t encouraging that this report found that after using a more appropriate discount rate, the amount of Missouri’s unfunded pension liabilities totaled more than 4 percent of Missouri’s entire economy. As of the end of last year, Missouri’s economy was $258 billion; 4.2 percent of that is $10.8 billion. If the state cannot make up that amount, then you, the taxpayer, are on the hook to make up the difference. There are other states whose pensions are in much worse shape than Missouri’s, but our state still faces an economic ticking time bomb. Whether dealing with a grenade (Missouri) or a daisy cutter (Illinois), taxpayers will not be happy to be caught in the blast. The Show-Me Institute has written extensively about how Missouri can start to address its pension problems by shifting to more efficient plans such as defined contribution or cash balance plans. Hopefully, this new report can serve as a wake-up call to policymakers that change is needed.

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Though this story is fictional, the situation is a reality for many teachers in Missouri. Take, for example, the actual salary schedules of two public school districts, Jefferson City and Hickman Mills. Teachers in Jefferson City (Peter) start at a slightly higher salary than teachers in Hickman Mills (Paul), and they continue to earn a higher salary for 23 years. However, toward the end of their careers, Hickman Mills teachers receive larger pay raises and surpass their Jefferson City counterparts.

Over the course of a 30-year career, a teacher in Jefferson City will earn $29,213 more than a Hickman Mills teacher. Each of these districts is part of the Public School Retirement System of Missouri (PSRS). This system requires 29 percent of a teacher’s salary to be contributed to the pension system, 14.5 percent each from the employee and the employer. Assuming a constant 29 percent contribution rate, a Jefferson City teacher will have $8,472 more deposited into the pension system than a Hickman Mills teacher.

Because he or she deposits more into the retirement system, it would make sense for the Jefferson City teacher to earn more in retirement; however, that is not the case. Pensions in the PSRS system are based on a teacher’s three highest consecutive salaries, usually his or her final three years. The spike at the end of their careers gives Hickman Mills teachers higher final average salaries, meaning they earn more in retirement than the Jefferson City teachers.

Despite paying $8,472 more into the pension system, the Jefferson City teacher will receive more than $55,080 less than the Hickman Mills retiree over the course of a 30-year retirement.

This may sound unfair, but this is just the tip of the iceberg regarding problems with defined benefit pension systems. In an effort to boost their final average salaries, teachers and administrators regularly game these systems, switching positions near retirement. The result of the various forms of gaming is escalating payments by states or declining benefits for pensioners.

Missouri teachers and schools have seen an increase in their contribution rate eight times since 2004, rising steadily from 21 percent to the current 29 percent. Contribution rate increases are necessary to combat growing pension liabilities. In a recent report for the Show-Me Institute, the American Enterprise Institute’s Andrew Biggs noted that Missouri’s five largest public pension systems have unfunded liabilities of nearly $54 billion. PSRS accounts for more than $31 billion of those unfunded liabilities.

Each of the problems mentioned here stems from the fact that Missouri’s defined benefit pension systems do not tie an individual’s contributions directly to his or her pension benefits. That is why a teacher who has paid considerably less into the system can earn more in retirement.

Missouri and other states should act quickly to reform public employee pension systems. In a recent report from the Manhattan Institute, Josh McGee and Marcus Winters laid out a plan that would allow states to reign in unwieldy pension liabilities and make the system fairer for pensioners. This can be accomplished by abandoning our current defined benefit plans and replacing them with a system that allows pension wealth to accrue smoothly based on an individual’s contributions. McGee and Winters note that in many cases, this would allow states to raise teachers’ salaries considerably.

This type of reform would ensure that individuals who pay less into the system do not get larger benefits than those who pay more. It would also make pensions portable. This would be attractive to individuals who would like to teach, but are unsure of making it a career.

Our current defined benefit pension system for Missouri teachers is unfair and unsustainable. It’s time to stop robbing Peter to pay Paul’s pension. It’s time to fix our pension problems.

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Many things led to Detroit’s decline, but pension obligations are almost certainly what broke the bank in recent years. Policymakers in Saint Louis, Kansas City, and Jefferson City would be wise to heed Detroit’s warning. As Mary Williams Walsh recently wrote in an article titled “Detroit Gap Reveals Industry Dispute on Pension Math”:

It may sound arcane, but the stakes for the country run into the trillions of dollars. Depending on which side ultimately wins the argument, every state, city, county and school district may find out that, like Detroit, it has promised more to its retirees than it ever intended or disclosed. That does not mean all those places will declare bankruptcy, but many have more than likely promised their workers more than they can reasonably expect to deliver.

This is something we have been saying for some time. In a recent policy study, we noted that when an appropriate discount rate is used, Missouri’s big five public pension systems have more than $53.9 billion in unfunded liabilities. Pension fund managers downplayed our findings and said we were using unrealistic expectations. As Walsh notes, however, it may be the pension managers who are using the unrealistic expectations:

Much of the theoretical argument for retaining current methods is based on the belief that states and cities, unlike companies, cannot go out of business. That means public pension systems have an infinite investment horizon and can pull out of down markets if given enough time.

As Detroit has shown, that time can run out.

We need to learn from Detroit’s example and act before time runs out on our pension systems.

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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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The ruling is heartless. In essence, Judge David Lee Vincent III argues that it would be too costly to allow Saint Louis City students to choose where to go to school, because too many want to leave. So, instead of allowing those students to escape to a potentially better school, they have to stay to help perpetuate a failing system.

As Robbyn Wahby, executive assistant to the mayor of Saint Louis City aptly tweeted: “Status Quo 1-Kids 0.”

The Circuit Court’s ruling goes directly against a Missouri law that states: “[Unaccredited districts] shall pay the tuition of and transportation . . . for each pupil resident therein who attends an accredited school in another district of the same or adjoining county.”

The judge was able to sidestep that law by citing a 2011 study that estimated that more than 15,000 students who live in Saint Louis City would transfer to a school in a neighboring county if given the chance. The survey estimated that about 8,000 of those students would come directly from SLPS, with the remainder coming from a mix of charter schools and students participating in a voluntary transfer program.

That study estimated that the total cost of paying for transportation and education for those 15,000 students would be nearly $224 million each year. With that amount coming out of SLPS’ budget, SLPS officials testified that losing that much money would put the district at such a financial disadvantage that it could not serve the students who choose to stay.

In light of that evidence, Judge Vincent views the Missouri statute requiring a district to pay tuition and transportation of students who transfer out of an unaccredited district and to an accredited one as an unfunded mandate.

Though I have some questions about the math (15,740 students at $224 million comes to $14,231 per student, which appears to be cheaper than SLPS’ per-student expenditures of $15,861), the estimated cost is a symptom of a bigger problem.

The very fact that 15,000 students in Saint Louis City want to leave for a better school should be evidence enough that severe educational reform is needed. This is not a problem we should push aside because it will take some work to solve.

It is time to prioritize the education of students over the funding of districts. If public education dollars could follow any Missouri student to any school they choose (public, charter, private, parochial, virtual, etc.), then we would not be at this impasse. A wider variety of schools could take on the students from Saint Louis City who want to leave, and ease the potential burden of new students on the public school districts refusing to let city students in.

Frankly, closing bad schools is one option worth considering. If that is what is needed to ensure Missouri students have access to a quality education, then it is the right move.

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