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Even as neighboring Illinois gets lambasted regularly for having the worst-funded public pension plans in the nation, Missourians have believed their state’s plans to be relatively sound.

Now the Show-Me Institute wants to shake us out of that comfort zone. The St. Louis think tank published a study by Andrew Biggs, a scholar at the American Enterprise Institute in Washington, who claims that Missouri’s unfunded pension liability is $54 billion, nearly five times the official estimate of $11.1 billion. (Note: The original version of this column incorrectly stated the amounts in millions instead of billions.)

By Biggs’ calculation, the state’s five biggest pension funds have enough assets to cover just 46 percent of their projected liabilities.

The plans themselves claim they are 80.5 percent funded.

It’s important to note that no one is accusing the state, or its pension administrators, of doing anything wrong. The funds follow rules set by the Governmental Accounting Standards Board, and Missouri — unlike Illinois — has faithfully made the contributions it was supposed to make.

Biggs, though, says the accounting rules disguise the amount of risk that taxpayers take when they promise to pay a pension decades from now. The discount rate, which pension actuaries use to value those future promises, is at the center of his argument.

Government pensions assume that their discount rate is equal to what they’re going to earn on future investments. The Missouri plans use discount rates ranging between 7.25 percent and 8.25 percent.

Biggs argues that the state must take risks to earn that high a rate, while the pension obligation will be the same whether the markets soar or crash. He says states should use a risk-free rate, perhaps something closer to the 2.8 percent that Missouri pays on 15-year bonds. His study uses 4 percent, which he says “might be thought of as approximating rates over a longer period of time.”

A lower discount rate means a bigger future liability. Most academic economists would agree with Biggs’ argument, but Steve Yoakum, executive director of the Public School Retirement System of Missouri, says it doesn’t work “out here in the real world where I have to live.”

He says the PSRS fund, which assumes that it will earn 8 percent returns in the future, has actually earned 9.3 percent on average over the past 20 years. “For us to make an assumption that we’re not going to do that in the future would be kind of foolish,” he said.

Gary Findlay, executive director of the Missouri State Employees Retirement System, argues that Biggs’ “fundamental flaw” is “the presumption that public sector defined benefit plans should be in the risk elimination business rather than the risk management business.”

Using a risk-free discount rate, Findlay says, is about as sensible as arguing that the state should take a zero-risk approach to traffic accidents — by banning cars.

Findlay and Yoakum argue that Biggs and the Show-Me Institute approached this study with an agenda: promoting 401(k)-like plans as a replacement for traditional defined-benefit pensions.

Biggs does indeed argue that a defined-contribution plan, like a 401(k), would limit future liabilities and would be “superior … in terms of attracting and retaining quality employees.”

He may be right. Many private employers say young workers are much more interested in a good 401(k) than in a pension that they may not stay around long enough to collect.

The state’s pension managers would counter that they’ve created a lot of value for public employees, and they’re right. Taxpayers, however, could benefit from a full-fledged discussion of the costs, benefits and risks of maintaining the pension system.

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