Bill seeks to modify state public school retirement system

Proposal meets resistance from some panel members.

By Mike Anthony, Executive Editor

Mehlville Fire Protection District Board of Directors Chairman Aaron Hilmer supports proposed legislation that would establish a defined-contribution plan in the Missouri Public School Retirement System for new employees.

But Hilmer told the Missouri House Retirement Committee last week that House Bill 409 doesn’t go “nearly far enough.”

After a two-hour hearing Feb. 24, Retirement Committee members took no action on the legislation, which was withdrawn in its present form by its sponsor, Rep. Andrew Koenig, R-Winchester.

HB 409 would establish a defined-contribution plan in the Missouri Public School Retirement System for any new employee who becomes a member beginning July 1, 2013. Such membership would be automatic unless the employee elects to become a member of the current defined-benefit plan within 12 months of his or her hire date.

“… In the Public School Retirement System we have as of June 30, 2010, we have $8.3 billion in unfunded liabilities,” Koenig told the Retirement Committee, noting the system is 77.7 percent funded. “Assuming normal market conditions, the contribution rate is expected to exceed 17 percent in the coming year. A 17-percent contribution rate is actually closer to 20 percent of the employee’s salary because it’s based on their total compensation. Some organizations say: Don’t fix something that is not broke. But the reality is, it is broke.

“If you went to go get a loan at a bank and said based on expected expenses and future income, I’ll only be able to pay back the loan 77 percent, I don’t think that they would give you a loan. With billions of dollars in unfunded liabilities, I would expect any member of that retirement system to encourage legislators to take action to fix the problem. Doing nothing will only threaten the entire system,” he said.

Koenig said according to the system, normal contribution rates should range from 10 percent to 12 percent for both the employee and the employer. The contribution rate for the 2010-2011 school year is 14 percent for the employee and 14 percent for the employer or school district.

Koenig identified three problems with the current system:

• Contribution rates for employees exceed 12 percent.

• Contributions for the employer exceed 12 percent.

• Billions of dollars in unfunded liabilities.

“Although House Bill 409 only fixes one of these problems, the employee’s contribution rates, I’m open to suggestions and willing to work with the committee to fix all three …,” Koenig said, later noting a defined-contribution plan would allow participants “to control their contributions and invest the money as they see fit. By offering more options to employees, it will make the teaching industry more competitive …”

Koenig’s bill met stiff resistance from some committee members, including Rep. Genise Montecillo, D-Affton, who has taught in the Special School District for roughly 25 years.

She asked Koenig about his assertion that offering a defined-contribution plan would make the teaching industry more competitive and noted that during her years as a teacher “I’ve never heard of one teacher complain about our retirement system.”

Koenig said, “Well, it’s like any benefit package that you offer to employees. There’s going to be some employees that like the pension. There’s going to be some employees that like the defined-contribution (plan). So if you offered both, you’d be satisfying both people. So it would be more competitive.”

Montecillo asked, “Have you received complaints or are teachers coming to you wanting a defined-contribution plan because again, like I said, I have in 25 years of teaching, I’ve not heard one single colleague complain about our retirement system.”

Koenig said, “What I have heard complaints of are the rising contribution rates that they have to pay out of their salary and so you would either have to cut their benefit or offer an alternative plan.”

Montecillo later told Koenig, “Well, I appreciate your concern for us. I really do. I’m sure it’s sincere and you’re concerned about our best interest, however, I have been inundated and flooded with letters of teachers who do not want the change. So there seems to be this concern for us that — you have a concern for us that we don’t ourselves have …”

At one point, the committee’s vice chair, Rep. Cloria Brown, R-Concord, noted much of the discussion on Koenig’s bill had centered on new teachers, current teachers and those retired teachers currently drawing benefits from the defined-benefit system.

“… What we’re not talking about is the people who actually have at least 50 percent interest in it and that’s the taxpayers who have to pay this …,” she said, noting for the 2011-2012 school year taxpayers will contribute 14.5 percent to the system. “So that’s a lot of money for the taxpayer. So I do hear from the taxpayers. The taxpayers are saying to me: This is a lot of money. Nobody puts this kind of money in for me for my Social Security …”

Koenig said, “… I absolutely agree. I mean, ultimately who’s paying for it? It’s the taxpayer and the taxpayer’s on the hook for the billions of dollars in unfunded liabilities.”

Hilmer was the only person to testify in support of the proposal.

“However, I do not feel it goes nearly far enough …,” he told the committee.

“… At the Mehlville School District, the superintendent when he retires this year, will become a millionaire every five years. He’ll receive roughly $200,000 a year in guaranteed payments for the rest of his life. And we also have the issue of increasing contribution amounts. This was taking away from services to the public. At the Mehlville School District, just in the last two years their rate has increased by $1.2 million. That’s roughly 1.5 percent of their budget.

“That’s one reason they came to the taxpayers of south county for a tax increase this fall and it failed by a 2-1 margin because people are unwilling to pay these increased amounts as referenced by Rep. Brown …”

Hilmer also cited the fire district’s experience in terminating the district’s defined-benefit plan and changing it to a defined-contribution plan for all employees without impacting benefits for retirees.

“… We did this in 2006. At the time, the fire district had an unfunded liability of $6.8 million. If we wouldn’t have made the change then, our unfunded liability today would be $19 million,” he said. “By making this tough decision before it became a crisis, we ensured that retirees would receive the payouts that were promised to them and we also were able to cut the pension tax levy in half for the residents of the district.

“There’s no reason why people who work for the public should receive better benefits than the taxpayers who provide them … I certainly would encourage you to debate Andrew Koenig’s bill and then send it to the House floor for a full vote. And I certainly welcome any questions you or your committee would have, Mr. Chairman (Rep. Mike Leara, R-Concord) on the conversion process,” Hilmer added.

Committee members had no questions for Hilmer.

Among those testifying against HB 409 were was Steve Yoakum, executive director of the Public School and Education Employee Retirement Systems of Missouri, who told committee members the retirement system is not in financial distress.

Referring to the 77.7-percent funding figure cited by Koenig, Yoakum said, “… The system has been better funded. It’s been less funded. The fact is, one needs to take a look at where you are and relatively speaking, that’s a pretty good funded ratio.

“The comparison that’s often used is one of a mortgage. If you paid off 80 percent of your mortgage and you’re making your payments, are you in financial distress? I would argue that you’re not, and I want to make that very clear that this fund is not in financial distress. We’re throwing terms around like fiscal crisis, schemes — those kinds of things.

“I want to make absolutely certain we don’t believe that we’re at risk of making benefit payments and we think there’s an actuarial funding schedule in place that will allow the system to reach 100-percent funded and obviously meet all the obligations of the plan. So the question of is this a crisis — no, it’s not a crisis. This is a philosophical difference about what you’d like to provide and what level of benefits you’d like to provide and how do you want to provide them?”

Yoakum later said offering a defined-contribution plan would shift the responsibility to the employee for managing his or her retirement assets.

Under the current defined-benefit plan, a board of trustees is charged with managing retirement assets, making investment decisions and ensuring benefit payments are made, he said.

“In essence, as you move to a defined-contribution plan you’re shifting that responsibility from that pension trust to the individual … Some people do it very well. Most people do not because they spend their time being teachers or whatever they do and not investment people,” Yoakum said.

At one point, Leara asked Yoakum about the difference between the actuarial value and the current market value of the system.

“… Let’s assume something dramatic happened such as the Legislature or someone else or the teachers or whatever happened, a scenario such as Mr. Hilmer spoke about, the defined-benefit plan was terminated,” Leara said, estimating in that case the system would be $13 billion to $14 billion underfunded.

“Not quite that much. It’s somewhere in the neighborhood of about $9.5 (billion) to $10.5 (billion). We’ve had a nice run in the market since the numbers you’re looking at …,” Yoakum said, noting the system has about $26 billion to $27 billion in assets and roughly $36 billion in liabilities. “So again, that’s where your $10 billion difference is. You’re exactly right …”

But Yoakum also noted, “… Virtually every plan, though, uses some type of of rolling average. We, like most, use a five-year rolling average to value gain and losses. We do that because it takes the volatility out because if you look from an investment standpoint over a five-year period, you’re going to see gains. You’re going to see ups and downs, but if you smooth that over a five-year period, over the long run they work themselves out. So consequently we like most plans will roll in 20 percent of our gains and losses in any given year — the actuarial value versus the market value …”