In Montana, state employees (including public school teachers), are provided a guaranteed retirement pension as part of their compensation packages. Nationwide, there has been increasing concern about state pensions and the liabilities of taxpayers to fund them. https://www.city-journal.org/chicago-housing-market

When an employer bears the financial liability to fund a specific retirement income benefit, it is called a defined benefit plan, or pension. This means that the employer is guaranteeing, based on the employee’s years of service, salary, and age at retirement, a specific monthly income for life during retirement. Most of us are more familiar with defined contribution plans (401k, 403b etc.) where the individual is responsible for the contributions, often matched by an employer, but there is no guaranteed benefit at retirement.

In Montana, state pensions are guaranteed by the Montana constitution which requires that state pensions be funded on an “actuarially sound basis” (1). This means that if the state pension systems don’t have enough money to deliver the promised benefit for state employees, the legislature must increase taxes or transfer money from other programs to make up the difference.

In theory, this all should come out just fine. The state determines how long people live and, based on the benefit formula, how much money is needed to pay out the benefits the state has promised. The state then determines how much the contributions of state employees and the state (taxpayers) should be based on the expected rate of return of the investments to pay out the promised benefits. If the returns don’t come in as expected, or benefits are increased without more contributions being allocated, then there is a shortfall which the taxpayers need make up. In Montana’s case, the shortfall, technically called “unfunded liability,” to fund promised benefits is $4.5 billion.   

Below I lay out some of the specifics of Montana state pensions and why this is a pressing issue that few are willing to face or discuss. It is daunting. Here are the facts:

Additional taxpayer funding: From 2012-2019 taxpayers have funded, in addition to what they contribute as part of the state share to match state employee contributions, $660 million dollars to shore up state pensions (2). Despite that funding, pensions have increased in their unfunded liabilities to $4.5 billion, up from $3.6 billion in 2016 (3,5). Currently, approximately $125 million per year in additional taxpayer funding is scheduled for the 2021 biennium (4). This all assumes the problem does not become worse which is an unlikely scenario based on the states’ own consultants (6).   

Assumed Returns: The assumed rate of return on investment used by the Montana Pension boards to achieve adequate funding for the pensions is 7.65% (changed recently from 7.75%). This is the return needed, as I understand, to fully fund future pension obligations and keep pensions from having even higher unfunded liabilities (6). If we assume there will be a lower return, there will be higher liabilities (unfunded). A higher return assumption lowers the liabilities. A good article here: Pension plan investment return assumptions. Based on the actuarial analysis (attached below) done in April 2019 by Reason Foundation on the Montana Public Employees Retirement System (PERS) and Teachers Retirement System (TRS), the returns for TRS underperformed the 7.6% assumption over 18, 15 and 10 years respectively. The last 5 years the return has been over 7.6%. Long term (18 years) TRS has underperformed by about 2%. PERS returns are very similar (7). The underperformance is NOT an indictment of the Montana Board of Investments (BOI) which manages the pension portfolios. The fact is that those returns are hard to achieve over long time frames. In fact, based on assumptions by firms such as Goldman Sachs and the asset allocations in the pension funds, they expect lower returns over the next 5 years (8). If long term returns continue to underperform, more general fund money will need to be allocated as it has the past 16 years to fill the gap.  When I served in the legislature, we added approximately $150 million to pensions, making the total over the last 16 years close to a billion in additional funding. You can see in the Reason report that according to PERS’s own consultants, the probability of hitting the 7.65% target are less than 55% according to Horizon and 32% by RVK. Other firms are less optimistic estimating the probability between 17% at the low end to 25% on the high end (9). If these projections are actualized, the problem will grow more severe, requiring hundreds of millions above the $1.25 billion projected for the next 10 years to maintain pension solvency.

Analysis of lower returns by legislative services shows that a 1% lower return will devastate the financial soundness of the system and would make PERS unamortizable, and TRS amortizing in 90 years (10). The law requires that they must amortize in under 30 years. This is like having a house payment where the interest accumulating is higher than the payment you are making. Your debt keeps getting bigger and bigger and you never can pay it off.

Unfunded liabilities are growing regardless of the $115-125 million per year in additional contributions. As I mentioned above, the pensions were $4.5 billion underfunded in 2018 which compares to $3.6 billion in the 2016 and approximately $385 million in 2002 (11). This may improve with the recent fiscal year close for June 2019. However, the trend has been consistent for nearly 20 years. Since I have been involved in 2005, the unfunded pension liabilities are getting larger and the amortization period to fund those liabilities is getting longer even as additional taxpayer funding has dramatically increased. The legislative fiscal divisions 2021 report indicates that the amortization period for both TRS and PRES are outside of the 30-year statutory funding law and the Constitution’s requirement on pensions (1,5). However, no action was taken in the 2019 session to address this problem. When you see a consistent negative financial trend in pensions over decades, you need to make decisions for change. Prolonging those decisions is not helpful.

Actuarially unsound:  Current (2018) legislative reports show that TRS amortizes over 31 years and PERS over 38 (5). These two large Montana pensions systems are not within the constitution as noted above or the law to amortize them in under 30 years (1). Based on the information I have, as of Feb. 2019, there is currently a $10.7 million contribution needed (not done in 2019 session) to bring PERS to the 30-year standard (10). Unfortunately, our pensions are not in good shape. They are out of compliance with the law and constitution. In addition, return assumptions are too high based on most analyses. If returns assumption were lowered to be more realistic, the problem is worse, but at least it is honest. By keeping return assumptions and discount rates high, the problem is being swept under the rug so money can be spent elsewhere. We need an accurate and realistic evaluation of pensions because the problem will haunt us in generations to come if we don’t. It’s no different than a financial advisor telling a client he can retire because he will get a 10% return on his money. Sounds good, but its deceitful and there will be a day of reckoning where there is no more money.  

Solutions:

Montana pensions have serious funding problems and there are no quick fixes. The Montana constitution guarantees that these pensions be funded. Therefore, the legislature has no choice but to fund current pension obligations.   

We first must be honest about the problem. If we lowered the return assumption just 1%, PRES does not amortize and TRS amortizes over 90 years. This creates much higher unfunded liabilities, but at least we are being more honest and not ignoring the problem and diverting needed funding elsewhere.   

For future hires, we need to consider if moving the state to a defined contributions plan (see above for definition) is warranted. Defined contribution plans are very attractive, particularly to the 64% of state employees who leave before 5 years when they would have been vested in PERS (12). With a 100% match from the state of up to 7% of employee contributions vested gradually over 5 years, this is very attractive and beats almost all private sector 401ks. This is not an easy solution either, as we will need to continue to fund existing state employee pensions without the contributions of new employees. However, if we do that the financial hole eventually gets filled and the problem is solved. Doing nothing creates a problem of unfathomable proportion that is not possible to fix within the means of state taxpayers and other needed state services. If a defined contribution plan is not the solution, then we need to work together to find a solution. The status quo kicked down the road is not an affordable strategy.

My goal in my communications is to be accurate. I realize that each day and year the numbers will change, but given the most current information I have, the pension problem is worsening and is, I believe, the most serious long- term financial issue the state is facing. If you think or know otherwise, I want to hear from you!  My goal is that those who have been promised the pensions get what was promised and to protect taxpayers from an unmitigated financial disaster. Hard choices are ahead of us. You should know the facts. When you consider your vote for Governor, or legislators, first ask them what they know and what their plans are to address state pension underfunding in the future. The time to act is now.  

Tom McGillvray

1. Article 9 section 15 of the Montana constitution says: “Public retirement systems shall be funded on an actuarially sound basis” ) and the Montana Code Annotated (MCA): 19-2-405 (4)(a) says, ”The unfunded liability contribution rate, which is entirely funded by a portion of the required employer contributions to the retirement plan must be calculated as the level percentage of current and future defined benefit plan members’ salaries that will amortize the unfunded actuarial liabilities of the retirement plan over a reasonable period of time, not to exceed 30 years, as determined by the board.”
2. Data available upon request
3.  2019 Budget-Analysis/Volume-1/0Volume1.pdf page 58
4. 2021 Biennium legislative budget analysis page 50
5. 2021 Biennium legislative budget analysis page 60
6. 2021 Biennium legislative budget analysis page 61
7. Montana Retirement System Solvency Analysis Summary page 11-12 (this report available upon request)
8. 2019/Budget-Analysis/Volume-1/0Volume1.pdf page 59
9. Montana Retirement System Solvency Analysis Summary page 20
10.  Actuarial Valuations Pensions 2018.pdf
11.  Montana Retirement System Solvency Analysis Summary page 2,3
12.  Montana Retirement System Solvency Analysis Summary page 52

For more historical information on Montana Pensions:

1. Montana Legislative information:  MT Legislative Pension website