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Members Vote to Support Governor’s Proposal to Fix PERS
A motion to support Governor Schweitzer’s proposed plan to fix the public employees retirement system’s fiscal problems was endorsed by MPEA at its Annual Meeting June 16. The Governor’s approach to correcting the unfunded liability within PERS followed a discussion on the system by former MPEA executive director Tom Schneider.
Schneider, who first became involved in the retirement systems in 1956 as an employee of the Teachers Retirement System, said PERS is underfunded by $1.6 billion. “I understand where the figures come from but it is incorrect to think this underfunding has to be made up today.
“We have a 30-year period, there is nothing immediate. We can get a handle on it by moving slowly and in the right direction, but we have to start now!” Schneider explained.
He then began to discuss House Bill 122 from the 2011 Legislative Session. “They only implemented half of the PERS Board’s proposed bill and that’s the part that reduced benefits. The other half of that legislation was to increase employer contributions and those provisions were stripped from HB122.”
In reviewing the Governor’s proposal, Schneider explained that it made progress by attacking the unfunded liability in five-year increments. “The Governor’s proposal is the other half of House Bill 122 plus House Bill 632 which used some of the unobligated coal tax revenue.” More specifically, for PERS the Governor has proposed that employers and employees each contribute an additional 1 percent to the retirement plans, raising an estimated $13.7 million per year from each source, and the state would contribute an estimated $18 million per year from coal-tax severance funds. There would be an additional local government contribution as well.
The Governor has said “By the year 2020 we will be actuarially sound.”
Schneider also touched on legislative staff attorney David Niss’ opinions of making changes to the system for current employees. Schneider said Niss had told both the State Administration and Veterans Affairs and Legislative Council that “what exists for current employees is a contract you can’t break, but if you try here is a road map that will provide you with the most credibility.”
Schneider concluded his remarks by noting that he had spent 55 years working to improve the systems “and I’m not going to walk out now.”
Schneider was asked to distinguish between a defined benefit plan and the defined contribution structure being promoted by some politicians. It was explained that a defined contribution plan has no annual guaranteed annual benefit adjustment, places all risk on the employee and provides no guarantee that there will be anything there when it comes time to retire. “A simple illustration of my problem with the DC approach is the fact that the retirement systems lost $3.5 billion dollars when the market fell in 2008. If the employees had been in a DC plan, THE EMPLOYEES would have lost $3.5 billion dollars out of their own pockets.”
Schneider also said it is actually cheaper to fund the present system. He also noted that taking new employees out of the pension mix is fiscally stupid because new contributors are needed to fund the benefits of those who retire and without them unfunded liabilities grow.
Actuaries Cost Defined Contribution Conversion
There was legislation in the 2011 session to eliminate Montana’s defined benefit retirement structure and replace it for new hires with a defined contribution system that places all risk on employees and eliminates a guaranteed monthly amount. MPEA expects to see that legislation again in the 2013 session.
Anticipating reintroduction of such a change staff at the Montana Public Employees Retirement Administration (MPERA) had its actuaries perform an analysis to determine the financial effects upon the Public Employees Retirement System if it were closed to new members as of July 1, 2012 and all future eligible employees would be placed in a defined contribution system.
The actuaries from the Cheiron firm began by noting that at the last valuation date of June 30, 2011, PERS had an unfunded liability of $1.6 billion, which was 150 percent of current covered payroll. Paying off the unfunded actuarial liability depends upon contributions from future payrolls. If the system is closed to new members, the covered payroll of the defined benefit plan would decrease each year.
The actuaries note that there are two immediate impacts. First, such a change would cause an immediate increase in the amortization amount and consequently an immediate increase in the annual required contribution. Second, the actuaries currently develop figures based on a rolling 30-year period, meaning that they restart the 30 years at each valuation date. With a closed membership, the actuaries would move to a closed amortization period of 30 years from the date that the system is closed to new members.
So, what are the costs!
In the fiscal year beginning July 1, 2012, the actuaries expect contributions of about $85 million but these would drop below $15 million by 2036; this assumes that the current employer contribution rate of 7.13 percent will continue for all future years
According to the actuaries, if you assume contributions equal to the annual required contribution were made for each year beginning July 1, 2012, the contributions would need to be increased to $216 million in 2012 and then would slowly decrease , but would still be almost $140 million by 2036. Put another way, as a percentage of pay the employer contribution would increase from about 18 percent in 2012 to almost 67 percent of pay in 2036.
The actuaries note that the advantages to a defined contribution system is that the contribution becomes fixed and predictable and that there are no unfunded liabilities. Additionally, these plans are more portable and have lower administrative costs.
At the same time, according to the actuaries, studies have shown that rates of return in defined benefit plans consistently exceed those obtained in individual defined contribution plan accounts. Another advantage of defined benefit plans is the pooling of longevity experience; early deaths offset the cost of those whose lifetimes far exceed the average. Also, since large defined benefit plans are ongoing, investment losses can be absorbed and recovered by future investment gains over long periods of time.
The actuaries summed up their report to MPERA by noting that for a given level of contributions, retirees will receive more income from a defined benefit plan than from a defined contribution plan.
BUTTE/SILVER BOW VOTES TO KEEP SOCIAL SECURITY
Employees of Butte/Silver Bow voted January 18 to continue their participation in Social Security.
During a routine IRS audit some years ago, it was discovered that the city-county didn’t have what is known as a Section 218 agreement filed with the federal government.
The agreement is necessary for government entities already participating in a retirement program. The city of Butte and Silver Bow County each had separate 218 agreements in place, but those dissolved when the two entities consolidated in 1977. Fortunately, city-county employees and the local government have since paid into Social Security.
There had been some concern that individuals might want the tax-free refund that covered three years in Social Security contributions. The employees decided, however, that they “wanted in.”
DAHLE OPENS CONTRACTS
MPEA Filed Representative Darcy Dahle reports that both the Huntley Project School District and the Big Horn County Sheriff’s contracts are open for negotiations.
The Yellowstone County Courthouse Chapter is also preparing for negotiations.
At the Pine Hills School for Boys in Miles City negotiations have stalled as chapter members await settlement of an unfair labor practice charge filed by MEA-MFT.
COLSTRIP FIRST EVER
A “first ever” contract for Colstrip city workers has been ratified, according to MPEA Field Representative Darcy Dahle.
The three-year contract, which took effect February 1, covers support staff, custodians and water department personnel. The Colstrip contract also covers a city judge.
Dahle said a pay matrix that had been created but not implemented has been incorporated into the new contract and also provides a pay increase of 3 percent in each of the coming two fiscal years. There was also an immediate impact from proper placement on the matrix for some of the chapter members.
The contract also integrated existing health plan provisions and the existing flex plan. A grievance process ending in binding arbitration has also been incorporated into the contract.
Dahle explained that much of the general contract language came from the Colstrip Police contract.
Working with Dahle in developing this “first ever” were Tana Pippin and Bryan Swan.
COONEY HOME TO BE SOLD
The Lewis and Clark County Cooney Convalescent Home is being sold. Although all things are not finalized it is anticipated that April 30 will be the last day workers will be county employees.
An East Coast company, Apple Rehab of Connecticut, is the purchasing company and has recently purchased nursing homes in Yellowstone and Jefferson counties and in Wyoming in an effort to build a western presence.
MPEA has represented workers at Cooney since May of 1993 and most recently negotiated a two-year contract that was ratified December 14.
The facility, named after Sid Cooney, county doctor from the early 1920s until the late 1960s, was built in 1939, though the name change occurred in 1961. But Lewis and Clark County has owned an elderly care facility since 1870.
At one time, many Montana counties were partners with long-term care homes for the elderly, often called “poor farms.” But in many cases, such ownership has ceased to be viable and most counties have sold their facilities. When the Cooney Home is sold there will be just two such facilities in the state.