Testimony: Legislation in Montana Would Use Marijuana Tax Revenue to Pay for Pensions
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Testimony: Legislation in Montana Would Use Marijuana Tax Revenue to Pay for Pensions

Dedicating marijuana tax revenues to pay down long-term pension debts can help improve a state’s financial position.

Chairwoman Beard, members of the committee, thank you for the opportunity to offer our brief analysis of House Bill 670.

My name is Steven Gassenberger, a policy analyst with the Pension Integrity Project at Reason Foundation, and I’m joined by my colleague Geoff Lawrence, Reason Foundation’s subject matter expert on drug policy. We are a national 501(c)(3) public policy think tank that offers pro-bono research and technical assistance to public officials and other stakeholders to help design and implement policy solutions in a variety of areas, including public employee retirement security and the emerging regulatory framework governing controlled substances.

The Pension Integrity Project’s quantitative team used decades of publicly reported data from Montana’s two largest public pension systems to build detailed actuarial models that we use alongside stakeholders to spotlight the long-term solvency challenges and financial risks facing both the teacher and public employee pension systems.

Our actuarial modeling suggests that, if not addressed, three issues will lead to a steady increase in costs borne by taxpayers as well as the growing degradation of these important pension systems.

First, investment underperformance relative to each system’s assumed rates of return has added over $2.1 billion in unfunded liabilities to MTRS and MPERS over the last 20 years. This underperformance has required the legislature to continually increase state contributions to these plans over time.

Second, the amortization policies for both MTRS and MPERS are perpetuating debt across generations by using excessively long amortization periods. MPERS specifically uses an amortization policy which resets the period used to calculate actuarially required contributions each year to a 30-year term commitment, passing the bill to future taxpayers.

Third, only 23 percent of new teachers and 14 percent of newly hired public employees will remain in full-career employment with the state long enough to each a full pension benefit according to each system’s comprehensive annual financial reports.

In a nutshell, the state of Montana has two underfunded pension plans serving a very small number of workers relative to total hiring.

Despite recent steps taken to increase contributions and a decade of historic market gains, neither system has seen any significant improvements. This highlights the fact that markets alone simply will not restore these systems to fiscal health and that other structural mechanisms are likely at play.

Future contributions will be needed to make up for those not given in the past. House Bill 670 offers one new way to address that need. By directing revenue from recreational marijuana sales to help pay down current unfunded liabilities faster than currently scheduled, House Bill 670 is likely to save taxpayers long-term interest payments on pension debt and ensure promises made to generations of state workers are managed responsibly.

Having engaged public pension and drug policy design and implementation with stakeholders in a diverse array of states, we have seen a variety of desired uses of marijuana tax proceeds get intractably complicated by the difficulty of accurately forecasting revenues. Historical data regarding the size of the marijuana market and its determinative trends simply do not exist. Estimates have been developed using household surveys of marijuana use and anonymous, crowdsourced data collected on the internet, but true, observable market data are largely unavailable due to marijuana’s previously illicit nature.

As a result, several states that have built marijuana tax revenues into their budget for ongoing publicly funded programs, like K-12 education or road maintenance, have been frustrated when their revenue projections are inaccurate.

House Bill 670 avoids those pitfalls by allocating uncertain tax revenues to pay off a long-term obligation and fund a rainy day account, which is consistent with the principles of sound public finance when considering the use of one-time revenues, or in this case, highly volatile tax revenue streams. Or perhaps more simply put, HB 670 would pay for obligations already on the books, while avoiding adding future obligations via new programmatic spending.

States should not appropriate marijuana tax revenues to fund ongoing programs until a track record of receipts has been established over a period of two to five years. House Bill 670, as well as some other measures being considered by this committee, would follow in the footsteps of Nevada, which successfully allocated all proceeds from its retail marijuana tax to the state rainy day fund for its first two years of operation. Dedicating marijuana tax revenues to pay down long-term debts, such as those found within public employee pension plans, can help improve the state’s financial position while avoiding the trappings that often come with building inconsistent revenue sources into a budget.

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Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.

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