Recent media accounts paint a dire outlook for the Montana Teachers Retirement System. The facts, however, tell a different story. Far from needing an immediate and staggering infusion of taxpayer dollars, the fund can be righted with more prudent, gradual and relatively small adjustments. The sooner we make those adjustments, the better the outcome will be for everyone — teachers, retirees, employers and taxpayers.
Clearly, the 2008-2009 market plunge and ongoing turbulence have given investors a bumpy ride. When the market collapsed, 401(k) investors on average lost a third of their account balance. Pension plans — both public and private — also took a big hit. But thanks to a relatively moderate-risk investment portfolio (managed by the Montana Board of Investments), TRS has fared better than many other retirement systems. In six of the last 10 years, TRS’ investment returns exceeded our expected rate of 7.75 percent. In Fiscal Year 2011, the fund’s investment return was 21.67 percent, although markets remain turbulent.
That helps, but we’re still digging out of the hole, along with everyone else, from the 2008-2009 losses. In a recent presentation, TRS’s actuarial consultants, Cavanaugh Macdonald, LLC, said that revenues coming into the fund are sufficient to cover the actual cost of benefits being accrued, but are not sufficient to overcome the funding shortfalls created by the market collapse. Those shortfalls reduce the assets available to pay benefits, adding to the system’s unfunded liability, which must be paid off over a reasonable period of time — 30 years according to the Governmental Accounting Standards Board.
The good news is the unfunded liability does not come due all at once. Rather, the retirement system will realize those liabilities over 20 to 30 years as today's teachers retire. We have a window of opportunity — if we act now — to whittle down the unfunded liability and return the pension fund to sound financial footing. In other respects, TRS is running smoothly. As of 2011, more than 18,000 active educators pay into the fund each month, and assets exceed $2.9 billion.
What will it take to reduce or erase the unfunded liability? The math can be complex, but one key equation is simple: Revenues must equal or exceed expenses. TRS revenues include monthly contributions from teachers, the school districts that employ them, and the state general fund, and returns on investments. TRS expenses are the benefits paid out and administrative costs.
Any long-term answer to the unfunded liability will likely include a combination of incrementally raising revenues and reducing expenses. Any such changes can be phased in gradually and balanced equitably in a package that everyone — teachers, employers, retirees, and taxpayers — can live with. At TRS, we’re actively looking at all options and working toward proposed legislation that can garner broad support from our members, the public, and from both sides of the aisle in the 2013 legislative session.
Montana’s public education system is vital to our economy, our culture, and our quality of life. More than 92 percent of Montana school-age children attend public schools, and the health of our economy and our communities hinges on a well-educated workforce. Professional teachers are the cornerstone of this system. Montana teachers currently contribute 7.15 percent out of every paycheck to help fund their retirement benefits. Pension benefits paid by TRS create a positive multiplier that ripples across the economy. National studies show that every taxpayer dollar invested in state and local pensions supports $11.45 in total economic activity.
As Montanans, we each have a stake in this conversation. Rather than wring our hands, we should roll up our sleeves and work together to secure a better future for our teachers and for all Montanans. The Big Sky isn’t falling, and reasonable adjustments now will ensure clear skies ahead.
(David Senn is executive director of the Montana Teachers’ Retirement System.)