The St. Louis Post-Dispatch recently reported upon the vote of the Board of the Missouri State Employees Retirement System (“MOSERS”) concerning state funding for the upcoming fiscal year. The Post’s heading “Missouri to increase funding of employee pension fund” was simultaneously accurate and misleading.
The $276 million was $20 million greater than the State had hoped to pay. However, pension funds such as MOSERS are operated on an actuarial basis, and Gabriel Roeder Smith & Company, the system’s actuary (and a nationally recognized firm in the public pension area) said that the proper contribution amount was $303 million. Even this number would have been much higher, except MOSERS uses a smoothing system that spreads out market gains and losses over a five year period.
One can understand why Governor Nixon and Missouri taxpayers may favor the approach taken by the MOSERS Board. If the actuarial amount had been contributed, the state budget would have had less money available for other state spending, or consideration would have had to have been given to a possible tax increase.
The strong objections from State Senator Jason Crowell, R-Cape Girardeau, are well taken, however. The retirement system is disregarding or minimizing actuarial calculations to reduce the contribution rate, but in the process of doing this, is creating uncertainty and possibly severe future problems.
Senator Crowell, a MOSERS Board Member, stated “We’ve put in jeopardy the actuarial soundness of the plan.”
Senator Crowell has special expertise in this area, since he is the chair of the Joint Commission of Public Employee Retirement Systems, and is a very knowledgeable legislator on the subject of public pensions. Though it is not made clear from the Post-Dispatch article, the MOSERS contribution level is also lowered by its expectation of investment returns at 8.5%. (Most public pension plans are currently forecasting investment returns between 7.25 and 7.75%.)
The wisdom of this year’s decision concerning funding of MOSERS can be meaningfully argued by both sides. However, my fear is that MOSERS and its Board may be getting on a slippery slope.
Once the Board decides not to follow actuarial funding guidelines in any given year, it is certainly subject to more political pressure to continue to do that in future years. If MOSERS Board had a publicly articulated a one-year only variance , due to extraordinary market and economic conditions, the actions of the MOSERS Board would be easier to justify.
With “5 year smoothing,” last year’s negative investment returns will impact contribution levels for years to come, so the funding issues are not likely to disappear in the next several years. When will MOSERS Board return to following the actuarial advice necessary to keep MOSERS sound?
The Missouri Constitution mandates that most public pension plans in Missouri, those having COLA benefits, must maintain actuarial soundness. If Senator Crowell’s predictions about future actuarial soundness problems do occur, the State of Missouri and the MOSERS Board will both regret this decision to fund at less than the actuarially recommended amounts.
4 Responses to “MOSERS Funding Decision”
Comments are closed.
I am the communications manager for the Missouri State Employees’ Retirement System. I am posting the following response on behalf of Executive Director Gary Findlay:
Your observations seem based on news reports which, at best, were incomplete and, at worst, were very misleading.
The conclusion of the report of the actuary, with September 17, 2009 board action taken into consideration, reads (in bold print in their report) as follows:
“Based on the results of the June 30, 2009 regular actuarial valuation, it is our opinion that the Missouri State Employees’ Retirement System continues to be in sound financial condition in accordance with actuarial principles of level percent-of-payroll financing.”
The actuary’s conclusion reinforces the notion that the board is adhering to the funding policy stipulated in section 104.436 RSMo which reads, in pertinent part, as follows:
“The board intends to follow a financing pattern which computes and requires contribution amounts which, expressed as percents of active member payroll, will remain approximately level from year to year and from one generation of citizens to the next generation.”
Since the business cycle of a retirement system does not fall neatly into twelve month increments, a process called smoothing is used to spread investment return gains and losses over five year periods. This is done to mitigate volatility in the year-to-year contribution rate and is a practical approach to achieving the level percent-of-payroll financing objective. The decision of the Board had to do with whether to smooth all of the FY 2009 loss over a five year period or smooth part of it over five years and recognize the balance immediately. They opted to smooth it all over five years.
A great deal of media attention has recently been focused on the calendar year 2008 investment return of all public retirement funds in general and MOSERS in particular. Given the complete meltdown stemming from the credit crisis, the attention is understandable. However, the narrow timeframe focus can lead to false conclusions. For example, if you had started with $100 invested in the MOSERS fund as of January 1, 2007 you would, through all of the ups and downs, today have $97.25. If you would have invested that same $100 in an S&P 500 index fund during that period, today you would have $78.60. That speaks to the value of holding a broad market basket of well diversified investments. (As an interesting aside, an investment of $100 in Lee Enterprises stock, the parent company of the Post-Dispatch, during that time frame would have left you with $7.13 today.)
With regard to the investment return assumption, the average among large public funds is 8% and MOSERS is at 8.5%. We have consistently performed in the top 10 percent of the public fund universe, producing results that are well above average.
The future of the investment markets is unknowable. However, the portfolio is positioned to react relatively well regardless of the direction. The key message from the actuary bears repeating – “The System continues to be in sound financial condition.”
Gary Findlay, Executive Director
Missouri State Employees’ Retirement System
Since I did not have access to primary sources, I was blogging based on the Post article printed last Friday. I would be glad to review the full actuaries’ report, if you forward it to me. Please also feel free to forward a link to it, if it is in electronic format, so that all readers of this blog can review it.
What do the actuaries forecast as the percentage contribution rate for next year, assuming MOSERS does meet the 8.5% projected rate of return? Your comments about smoothing procedures are different than those I’ve observed in other plans, so I need to see your actuaries’ statements regarding the smoothing methodology used by MOSERS and used this past year.
Has the MOSERS Board made a commitment to fully fund based on the actuaries’ recommendations next year? My point was that deferring pain now makes it easier to keep on deferring. I believe it was Senator Crowell’s point as well.
Are the Post’s quotes attributed to Senator Jason Crowell accurate in terms of what he said, rather than in the terms of what you believe?
The accuracy of the Post-Dispatch’s quotes and its factual reporting are probably more relevant than the value of Lee Enterprises’ stock price. This doesn’t mean I’m a defender of the Post, which seems to have “dumbed down” in the last couple years. However, neither Lee’s stock price nor the Post’s journalistic style is an issue as much as the factual accuracy of the reporting. Please advise as to your specific criticisms of the facts set forth in the Post article of September 18.
P.S. Another alert reader pointed that Jason Crowell is the past chair of the Joint Commission, and that the current chairman is Rep. Ward Franz (R) from West Plains. http://www.ward.franz@house.mo.gov The chair rotates from the Senate to the House and back every two years.
As far as not having access to “primary sources,” we are not aware that you contacted anyone here at MOSERS for answers to any of your questions. Should you have questions in the future you may contact us at any time. Our contact information can be found at http://www.mosers.org/en/Press-Room.
The actuary’s letter and other pertinent information always are included in our Comprehensive Annual Financial Report. We are in the process of publishing that and it will be on our website soon. When it is complete, you can find a link to it on our website at http://www.mosers.org/About-MOSERS/Annual-Report.
Actuarial valuations are done each year using a multitude of the most current information including both economic data and non-economic data, i.e. mortality rates, probabilities on age and years of service, etc. Forecasting what the contribution rate will be next year would be speculation at this time. In terms of process, each September the board reviews the actuarial report and certifies a state contribution rate for the following July.
Your commentary that “the system’s actuary (and a nationally recognized firm in the public pension area) said that the proper contribution amount was $303 million” is not accurate. The actuary provided two alternatives, both of which were deemed proper. The decision of the Board had to do with whether to smooth all of the FY 2009 loss over a five year period or smooth part of it over five years and recognize the balance immediately. They opted to smooth it all over five years. Sen. Crowell did disagree with the decision, as noted in the articles, but board members had a lengthy, open discussion of both alternatives and then made an informed decision.
It is worth repeating the actuary’s statement regarding MOSERS funding. Their opinion, after taking into account the action of the board on September 17th, states:
“Based on the results of the June 30, 2009 regular actuarial valuation, it is our opinion that the Missouri State Employees’ Retirement System continues to be in sound financial condition in accordance with actuarial principles of level percent-of-payroll financing.”
I appreciate the responses of Krista Myer and Gary Findley, of MOSERS, which is viewed as a well-run public pension fund.
Krista, please e-mail me both the current actuarial report and the recent letter from the actuary, so that I can review them. As you note, the MOSERS website currently has the annual report for the year June 30, 2008, and the actuary’s letter in that report is signed October 13, 2008, so current information is not publicly available. Again, I appreciate your offer to send the materials to me. Please send them to my e-mail address, dtobben@dmfirm.com.
The “slippery slope” issue that I have mentioned previously involves the long-term concern about MOSERS if there are choices to favor the “level percentage of payroll financing” principle over the “actuarial soundness” principle. The actuarial materials on your website show that MOSERS was 83.4% funded at the end of FY’08. What is the level of actuarial funding at the end of FY’09? On the website it is accurately observed that “being over 80% funded is considered good”. Will MOSERS defer to the State, and favor the principle of “level percentage of payroll financing” over “actuarial soundness”, if the funded ratio goes under 80%? Logically, a lesser percentage would be considered “not so good”.
I am also curious about the Judicial Plan, which appears on page 128 of the 2008 Report on your website. There isn’t a lot of narrative about the Judicial Plan, but it appears that the total actuarial accrued liability is $354,796,453, and that the actuarial value of assets is $73,194,379, resulting in an unfunded actuarial accrued liability of $281,602,074. Is this correct? If so, Judicial Plan seems dramatically underfunded (perhaps 21% funded and 79% underfunded).
In the actuary’s letter of October 13, 2008, the contribution rate for state employees is 12.7%, whereas the contribution rate for judges is 58.48% of payroll. I suspect that the difference in these numbers is largely attributable to the catch-up in the unfunded actuarial accrued liability. If I am misreading the materials on the MOSERS website or I’m incorrect about the funding levels of the Judicial Plan, I certainly expect that you will correct me and clarify the issue for our readers. If I am correct, have Missouri’s Judges been made aware of this severe degree of underfunding?
Again, a primary purpose of this blog is to generate lively and informed discussion about public pensions, and I certainly think we are getting it on this topic. As I noted at the beginning, MOSERS does have the reputation of being a well-run and well-funded public pension plan. Hopefully, that reputation continues into the future.