Pension fixes attract praise and criticism

Montana lawmakers are getting praise but also some criticism and even threats of a legal challenge for their approach to fix hundreds of millions of dollars of unfunded promises in the state’s two biggest public pension systems.

Plugging shortfalls in the Teachers Retirement System and the Public Employees Retirement System and making them actuarially sound as required by the Montana Constitution was a top priority for the 2013 session.

Two reform bills endorsed by Gov. Steve Bullock that promise to make both pensions sound almost overnight are on his desk awaiting his signature, albeit with a controversial amendment that caps cost-of-living adjustments for retirees.

House Bill 454 fills an estimated $1.8 billion funding shortfall in the Public Employees’ Retirement System with coal tax money and 1 percent bigger contributions from employees and employers.

“To be actuarially sound, you have to be able to pay it in 30 years,” said Roxanne Minnehan, director of the Montana Public Employees Retirement Administration.

The administration oversees the Public Employees Retirement System as well as several other unaffected pension programs in place for judges, sheriffs, police, highway patrol officers, firefighters and game wardens.

“We’re going from infinity, where the actuary can’t even calculate it, down to 15 years. That’s a big jump. So it fixes the issue,” Minnehan said of the Public Employees Retirement System.

Opposition has surfaced to a legislative amendment that reduces and caps the guaranteed annual benefit adjustment for retirees that was as high as 3 percent a year.

“This amendment reduces it to a ceiling of 1.5 percent and a floor of 0 percent, calculated annually based on how the pension fund is doing,” Minnehan said.

That cap plays a big role in the fix.

But Minnehan expects the provision to be challenged in court. “The original bill didn’t get us there immediately like this one does. It did it in like six years. I’m a little disappointed that has to be done on the backs of retirees,” she said.

Bullock’s office opposed the amendment and questioned its legality, Budget Director Dan Villa said.

“We understand that both current employees and retirees are considering legal challenges to address the amendments and we support that action. It’s important to keep in mind that this likely unconstitutional amendment doesn’t change one important fact: By implementing the remainder of Governor Bullock’s plan, Montana is the first state in the nation to fix our pension system without raising taxes,” Villa said.

Villa added: “Failure to act now would pose an event greater risk to current and future retirees.”

Under the proposed fix, employers can be tasked with gradually contributing up to an additional 1 percent if that becomes necessary to keep the fund’s liabilities payable in less than 25 years.

The pension fix is supported by the Montana League of Cities and Towns, Executive Director Alec Hansen said. Roughly 3,100 of the 28,500 people paying into the Public Employees Retirement System work for cities in the league.

“This is a huge financial obligation and I think the legislature did a terrific job putting together a reasonable program that will produce the results needed,” Hansen said. “I think most people are fairly satisfied.”

The 1 percent increase in employer contributions is anticipated to cost the league’s member cities a total of  $1.2 million a year in pension payments.

“It does not include a new permissive levy to let cities or counties levy any additional taxes. We didn’t ask for that or want that. Our cities all told me that they could fund this,” Hansen said. “They’ll have to move some money around, no question. But it won’t result in a property tax increase above and beyond the cap. And I don’t think there will be any reductions in services.”

The employer contribution increase will cost Kalispell’s general fund about $20,000 a year, City Manager Doug Russell estimated.

On the hook for 7.07 percent salary contributions before the increase, Kalispell paid $363,551 into the Public Employees Retirement System last fiscal year, according to budget records.

Brady Pelc, an employee in Kalispell’s parks department and the president of the local chapter of the American Federation of State, County and Municipal Employees, said the Legislature’s fix passes the burden onto employees and employers.

Kalispell employees paid 6.9 to 7.9 percent of their total compensation into the Public Employees Retirement System before the change — a share that now ratchets up another notch. Many people will just see more money coming out of their checks, Pelc predicted. “It is a very nice retirement system. Not a lot of employers can offer a defined benefit plan like that, so I feel lucky and fortunate to have that offered to me, but it definitely comes at a cost.”

HOUSE BILL 377 to reform the Teachers Retirement System also is on the governor’s desk.

“The bill is probably a good compromise,” David Senn, the system director, said. “There’s probably something in there for anybody to like or dislike.”

With 13,300 retirees drawing pension checks and 18,400 employees paying into the fund, the system had accrued unfunded liabilities totaling almost $900 million, Senn said.  

“Bottom line, our teachers and administrators and public schools will be asked to pick up a significant portion of the increase,” Senn said.

Teachers’ pension contributions will increase from 7.15 to 8.15 percent of their pay.

School districts also must pay 1 percent more. And like new teachers hired after July, districts also could face gradual contribution increases totaling up to another 1 percent if needed to keep the pension fund sound.

New teachers also will have to work for at least 30 years and be 55 or older before they can retire and draw a pension. Existing law lets them retire after 25 years at any age.

“Retirees will see a reduction in cost-of-living adjustments,” Senn said. “They’re 1.5 percent now and will go down to .5 percent until the system is 90 percent funded. After that we can start to make increases, but it cannot result in the system going below 85 percent funded.”  

Mike Thiel, a teacher at Flathead High School and president of the Kalispell Education Association, applauded the Legislature for coming up with a shared solution and fixing a system that needed fixed.

“It was a problem that needed to be solved,” Thiel said. “Neither was perfect, but they both saved the idea of a pension and that’s pretty important for government employees and teachers.”

Compared to the reduced cost-of-living adjustments, saving that pension system is the important thing, Thiel said.

“I’m friends with people retired out of both systems, and both groups are frustrated that retirees won’t get the guaranteed adjustment. But the message ought to be, ‘Let’s be patient.’ The [guaranteed annual benefit adjustment] is not the pension. The bottom line is we still have a defined benefit pension. We saved the pensions and the state of Montana should be proud of that. Name another state that did that.”

Reporter Tom Lotshaw may be reached at 758-4483 or tlotshaw@dailyinterlake.com.