Legislative Committee to Review Retirement Bills

    An interim legislative committee will once again provide centralized legislative oversight of all public employee retirement legislation. This was accomplished with passage of HB2 sponsored by Rep. Verdell Jackson, Kalispell, during December’s special session.

    Motivation for the reassigning of the retirement oversight to the State Administration and Veterans’ Affairs Committee (SAVA) came from concern over the fiscal health of the Teachers Retirement System and the Public Employees Retirement System coupled with an acknowledged lack of understanding of how retirement systems work.

    HB2 mandates that the interim committee (SAVA):

1. consider the actuarial and fiscal soundness of the state’s public employee retirement systems, based on reports from the teachers’ retirement board, the public employees’ retirement board, and the board of investments, and study and evaluate the equity and benefit structure of the state’s public employee retirement systems;
2. establish principles of sound fiscal and public policy as guidelines;
3. as necessary, develop legislation to keep the retirement systems consistent with sound policy principles;
4. solicit and review proposed statutory changes to any of the state's public employee retirement systems;
5. report to the legislature on each legislative proposal reviewed by the committee;
6. attach the committee's report to any proposal that the committee considered and that is or has been introduced as a bill during a legislative session;
7. publish, for legislators' use, information on the state's public employee retirement systems.

It was stated at several legislative hearings that the oversight function had existed in the past. Indeed it had, according to Sheri Heffelfinger, the legislative research analyst who staffed retirement committees until recently.

    In 1991, the Legislature requested a study of public employee retirement systems. “The study committee was looking for some consistency in policy-making and oversight,” Heffelfinger explained.  The result was the introduction and passage of HB65 in 1993. This legislation created the Committee on Public Employee Retirement Systems (CPERS). Everything was to flow through CPERS, but it had a sunset date of July 30, 1995.

    In 1995, legislation (HB471) was passed to move the sunset date to 1997. HB471 also deleted language requiring a retirement plan proposal to be submitted for review at lest 45 days prior to the legislative session and replaced it with language that CPERS could provide a deadline for submittal in its study plan, Heffelfinger recalls.

    In 1997, at the request of CPERS, the sunset date was once again extended, this time to 1999. In a separate but related piece of legislation, it was requested that the Legislative Council designate an appropriate interim committee to replace or modify PERS to accommodate implementation of a defined contribution retirement plan. The committee designated was CPERS.

    Heffelfinger notes that in 1999, there was a reorganization of interim committees. Seven permanent interim committees were created, including the State Administration, Public Retirement Systems and Veterans’ Affairs Committee. During the 1999 session CPERS was allowed to terminate. It was commonly accepted that those duties would pass to the State Administration, Public Retirement Systems, and Veterans’ Affairs Committee, the name of which was changed to State Administration and Veterans’ Affairs in 2001.

    The duties now detailed in HB2 from the 2005 special session are pretty much the same as those created for CPERS back in 1993, Heffelfinger believes.

    There were several pieces of legislation in 2001 improving retirement benefits for PERS covered employees. These benefit increases have frequently been cited as the cause for the shortfall. This isn’t accurate.

    “The financial problems faced by PERB and TRS are not directly related to GABA legislation and although Carroll South blames unwise benefit increases by the legislature, there was never any indication to the retirement boards or to the legislature that any of these benefits were going to damage actuarial soundness. Additionally, these benefit increases were completely actuarially funded…assumptions being an 8 percent return over a 30-year period.

    “What upset the apple cart was the severe investment losses that cut into investment principal,” Heffelfinger believes.  No one foresaw this, not here, not in the rest of the country, certainly not the “investment professionals” at the Montana Board of Investments.

    In Heffelfinger’s opinion, a case can be made that this loss is simply the nature of defined benefit retirement plans. The employer assumes the risk and the risk was that the market would crash, and a crash is a crash because no one foresees it. Again, no one at the Board of Investments ever warned the retirement boards of a crash eating into principal. It may be inevitable with defined benefit plans because “funding is always based on assumptions, and market crashes are not accounted for in the assumptions of actuarial valuations; the employer will always carry the risk.” It has been the retirement policy of the state that pooling risk in defined benefit plans is better for most than having individual employees take the risk, which would be the case if only a defined contribution plan existed. “With defined benefit plans, employer bail outs will be required every 50 years or so,” Heffelfinger believes. This seems as sure as pressure to increase benefits when there are actuarial gains.

    Recently, former MPEA Executive Director Tom Schneider expressed concern about comments reported in the daily press and attributed to Governor Schweitzer of launching an initiative to allow public employers to change contributions or benefits when a shortfall occurs. Schneider said he was assured that the governor supported the defined benefit structure. Schneider also said he was told there would be no tiered system, cut in benefits, or, employee increase. “We’ll take care of it by increasing the employer contribution,” Schneider said he was told.

    Additional ideas will surface during the next legislative session. It has already been suggested by Rep. Jackson that future legislation for benefit enhancements include an increase in employer and/or employee contribution to cover the cost. And, State Budget Director Dave Ewer has tried to improve communications between the investment and retirement boards through joint meetings.

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