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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.