Prepared for: House Committee on State Administration, Montana State House of Representatives
Chair Dooling and members of the committee:
Thank you for the opportunity to offer our analysis of House Bill 226 (HB226).
My name is Steven Gassenberger, and I serve as a senior policy analyst for the Pension Integrity Project at Reason Foundation. Our team conducts quantitative public pension research and offers pro-bono technical assistance to officials and stakeholders aiming to improve pension resiliency and advance retirement security for public servants in a financially responsible way.
We received our first invitation to provide research and feedback to legislative members in 2019 and have closely monitored and commented on the condition of Montana’s largest public pension funds since, including during recent consideration of HJ8 (2021) by SAVA this interim.
HB226 makes two updates to the PERS system:
1. Rearranges the way the state funds PERS-DB benefits.
Every year, PERS-DB actuaries calculate the contribution amount needed to keep the fund on track to achieve full funding within the established debt payment—or amortization—schedule. This figure is commonly called the actuarially determined employer contribution, or ADEC.
Rather than using an ADEC approach to funding retirement benefits, the state’s contribution rate has historically been set in statute, making payments into the fund controlled and predictable but often rigid and unresponsive to year-to-year needs. Only when system administrators find that the current statutory rate results in the system taking more than 30 years to become fully funded, is the statutory rate increase requested and legislatively adjusted. According to a 2020 Legislative Fiscal Division report the “…current funding policies leave the systems heavily reliant on investment earnings and unable to adjust contributions to maintain an actuarially sound basis in times of significant financial declines.”
HB226 commits the state and participating employers to fully funding benefits by a set date, regardless of investment performance or political trends. During an August 2020 hearing of the Legislative Finance Committee, PERS actuaries pointed out that “states are getting away from the old statutory funding method” and that “an actuary’s dream funding policy” is a system that adjusts “to keep up with how the plan is doing.” ADEC funding is a clear way policymakers can protect retirement benefits in bad times while finally tackling an important and expensive debt on behalf of taxpayers.
2. Sets the PERS-DC benefit as the default benefit for new employees.
Upon starting their career in public employment, new hires are offered a choice between the PERS Defined Benefit (PERS-DB) retirement benefit and the PERS Defined Contribution (PERS-DC)
retirement benefit. Currently, if an employee does not make a choice within their first year of employment, they are defaulted into the PERS-DB option. Both DB and DC plans can be adequate retirement options, but the DC plan (with its portability and steady benefit accrual) tends to be more advantageous for workers who do not continue to work with their public employer for multiple decades. Since most new workers fall into that category, it is best practice to make the DC option the default.
According to PERS data, regardless of the benefit chosen, 70% of all newly hired public employees will find other job opportunities outside of public employment within five years. An additional 15% will leave within ten years. Less than 10% of employees hired between the ages of 22 and 32 will stay in public employment for the 30 years required to earn an unreduced PERS-DB retirement benefit. As designed, the current PERS-DB default policy leaves the vast majority of public employees in a nonoptimal retirement plan, subsidizing the benefits for those employees who do stay 30+ years.
What HB226 does not do.
- HB226 does not change the PERS-DB benefit at all.
When changes to a pension system are suggested, anxiety and fear over the loss of post-employment income increases. However, HB226 does not change the PERS-DB benefit for retirees, current members, or future employees who will choose the PERS-DB benefit option going forward. In fact, the switch to ADEC funding included in HB226 should make those retirees and current members breath a bit easier as the state would now be committing to making whatever payments are necessary to fulfill the pension benefits promised to them.
2. HB226 does not make PERS benefits more expensive.
When a system and its employers move from a statutorily set contribution rate to one determined by actuarial necessity, model projections of future contribution rates are likely to show an increase in contribution rates in the short term, with a gradual decrease over time. Some misinterpret this initial increase as an increase in cost when it is in fact a reflection of the true cost of offering a guaranteed life-time benefit payment. The alternative has been a relative increase in unfunded retirement benefits (i.e. pension debt), which now total over $2.2 billion according to PERS data. The lower statutory rate has not adequately recognized this growing unfunded liability, whereas the proposed ADEC contribution would. HB226 would not only make the employer rate more proactive going forward from a debt reduction perspective, but more transparent in its acknowledgment and mitigation of accrued yet unfunded retirement benefits.
The changes offered in HB226 would address how PERS is only optimal to a fraction of public employees at an ever-rising cost, and turn the system towards best practices in public retirement benefit design. Having retirement benefit options aligned with employee trends, and on a sustainable funding regimen, empowers public employees to choose the best retirement path for themselves and their families with confidence.
Thank you again for the opportunity to speak today, and I would be happy to answer any questions.
Steven Gassenberger
Policy Analyst, Pension Integrity Project at Reason Foundation
steven.gassenberger@reason.org