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Missouri taxpayers to pay more for state employee pensions

Missouri taxpayers to pay more for state employee pensions

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JEFFERSON CITY • Missouri will pay an estimated $330 million next year — about 20 percent more than this year — to cover state employees' pensions.

Lower investment returns and longer life expectancies account for the bulk of the increased cost for taxpayers.

The board of the Missouri State Employees Retirement System approved the increase Thursday on a vote of 10-1. By law, the decision is binding on the Legislature and the money must be included in the state budget for the year beginning July 1, 2013.

The lone opponent, state Treasurer Clint Zweifel, said the zooming cost underscored the need for policymakers to review whether state pensions are affordable and whether the state is accomplishing its goal of recruiting and retaining a high-quality work force.

The system, known as MOSERS, covers about 51,300 state workers and 37,300 retirees, including elected officials such as legislators and judges.

The amount taxpayers pay is based on an annual actuarial study that considers factors such as how long state employees work before retiring, as well as how the system's investments are performing.

The decision to require more from taxpayers stems, in part, from the pension system's $1.8 billion loss in the stock market's downturn in 2008-2009, along with what actuary David Kausch called "kind of anemic" performance last year.

Demographics also played a role. People are living longer and thus drawing pensions longer. In addition, some state employees are delaying their retirements. Thus, they accumulate more years of service and bigger pensions.

State Budget Director Linda Luebbering said after the board's vote that state officials had been planning for the added expense.

"We know we're going to have to find that money in fiscal year 2014, and we will," she said. "It's something we've been aware of."

The new funding level was recommended by Gabriel Roeder Smith & Co., the system's actuary. Specifically, the actuary recommended that the board set the state's so-called "contribution rate" at 16.98 percent of the state's payroll for MOSERS-covered employees, up from 14.45 percent this year.

Board policy spreads out stock market losses — or gains — over five years to minimize sudden changes in the state's payments.

Kausch, the actuary, said that in asking for a "very big contribution increase" from taxpayers next year, the system is recognizing that not all of the stock market losses of 2009 will be recovered.

In the last fiscal year, which ended June 30, the system made 2.24 percent on its investments, said Chief Investment Officer Rick Dahl.

Next year, the MOSERS board is assuming its portfolio will earn 8 percent instead of 8.5 percent, the previous projection. The board made that change at its summer retreat, setting the stage for Thursday's vote requiring taxpayers to chip in more.

The 11-member board is made up of four legislators, two people appointed by the governor, two state employees, one state retiree, the commissioner of administration and the state treasurer.

Zweifel, who did not attend the meeting but sent a representative to cast his vote, said afterward that even with the additional state funds the board approved, the system might come up short. He said MOSERS was counting on overly rosy investment returns of 8 percent when 7 percent or 7.5 percent would be more realistic.

Assuming a lower return on investments would have required taxpayers to kick in even more next year than the board's decision requires. Either way, Zweifel said state policymakers should examine the bigger picture: whether the pension program is affordable and well-designed.

"An 18 percent increase is a big increase no matter how you slice it," he said of the contribution rate increase as tabulated by MOSERS.

Board documents pegged the cost of the new contribution rate at about $364 million compared with $309 million this year, so that was the figure Zweifel used to calculate the state's 18 percent increase.

But Luebbering said next year's tab would be closer to $330 million vs. $274 million this year, based on the actual state payroll. That translates to roughly a 20 percent increase.

Since fringe benefits are paid by the same source as an employee's salary, about $40 million of the $56 million increase will come from state general revenue, Luebbering said. The rest will come from federal and other funds.

While tax money and investment income provide most of the system's funding, MOSERS has another source that could improve its finances in the long run.

Newer state employees — those hired after Jan. 1, 2011 — chip in 4 percent of their paychecks. They also must work longer to earn pensions. About 5,832 state employees are in the new, scaled-back retirement plan.

Still, actuaries said not to expect the cost to state government to drop anytime soon.

"I would like to make the case that this is where the (state's contribution) rate is going to be" for several years, Kausch told the board.

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