The problem of the deficit in public retirement funds in Montana

One of the big financial problems facing the currently meeting Montana Legislature in Helena and the newly elected Gov. Steve Bullock is the large shortage of funds in the Montana Public Retirement account. While covering current expenses with the help of previous legislation, the retirement account is still running short of the funs that it ultimately requires.

Bill Thackeray

It is not the payment of current retirement accounts in trouble. Rather it is the actuarial or investment value of assets to raise interest for the fund that are in serious deficit. The deficit is, of course, partly due to the recent recession and the current strikingly low return on interest rates for money invested. But it is also partially due to drastic change in the Montana Public Employees retirement program that occurred just more than a decade ago and which has year by year affected funds in the retirement reserve and investment account since that time.

The effect of the recession on interest rates is we-known to all of us, but we don't often think of the drastic effect such low interest rates have on government budgets that depend on interest returns to meet a part of their financial responsibility. Even though Montana state government funds that are saved to show an interest return must be invested in very conservative accounts, the minimal interest available during the present recession has been so little as to considerably reduce the amount of money in such accounts.

To illustrate the growing effect of sinking investment return on public retirement in Montana, let's consider the loss to teacher retirement accounts — one of the largest of the public retirement responsibilities. This loss is well-documented, but is only a portion of the total public retirement responsibility in Montana. Such funds are figured as of each fiscal year June 30. In 2012, the actuarial liability was $1.352 million. By 2011, it had risen to $1.609 million.

Obviously, this liability deficit cannot go on without being seriously addressed by the present Legislature and administration.

Before we consider the possibilities that are being proposed, we should mention briefly the decade-long history of the public retirement situation that has added to the problem. This history goes back to the administration of Marc Racicot, who served as governor over the turn of the century. Racicot and his legislature were faced with a drastic shortage of Montana teachers.

Over the first two years of the Racicot administration, there was a decline in the issuing to Montana teaching certificates of more than 150 licenses to teach in the state. One-third of the teachers training in Montana universities were accepting jobs out-of-state — even though there were enough jobs for them in-state with lower salaries and benefits. State government figures projected there would be a shortage of more than 1,600 teachers in the state by the turn of the century.

Not surprisingly, this situation called for drastic action, a part of which was a task force appointed by the governor to propose solutions. One of the proposals, which was accepted, opened the retirement system for teachers, university faculty and generally almost all public employees in the state. The system was opened so that employees could withdraw from the state retirement plan, reclaim the money they had contributed to the plan and invest it instead in a private plan. The significant withdrawal of funds from the state program had a strongly negative effect on its current money accounts and reserves and its future investment income prospects.

At the time, such private plans were projected to pay a great deal more than the state plan. Ironically, many of those private plans have drastically reduced their payments over the past decade or even disappeared altogether at the present time. The state plan was the best option.

For the current Legislature, the retirement administration has proposed a flexible solution that could be modified somewhat as conditions develop between the period of the present Legislature and the two years until the next Legislature meets. The proposed legislation, that is regarded as probably providing a complete solution, would raise the contributions of all present employees by 1 percent from 6.9 percent of their gross pay to 7.9 percent. It would also increase the employers contribution to the plan by 1 percent.

A second — more controversial — aspect of the proposal would allow the state board to increase the retirement age of new retirees as necessitated by the health of the existing budget. This second step would be instituted only if certain guideposts in payments out of the account were not met during the two-year period.

An alternative proposal by Sen. Dave Lewis that does not seem to be picking up much support at the present time would phase out the state retirement plan and system altogether and force all employees into private plans.

One clear difficulty that is noted with Lewis' plan is that all accounts for presently retired employees would still have to be paid by contractual requirement — and that payment would in all probability have to be paid partially by taxpayers out of the state general fund.

Indeed, it will be interesting to see what our present Legislature does with this matter. Reps. Kris Hansen and Wendy Warburton will have to address the matter in the House of Representatives, and Sen. Greg Jergeson will be in a real hot-seat in the Senate because that is where the various proposals may well meet their biggest test.

(Bill Thackeray lives in Havre.)