woods mug

Rep. Tom Burnett’s latest guest column would have you believe that Montana’s pensions are in big trouble. They are not. He insinuates that pension problems experienced in Illinois are happening in Montana. They are not. He states that pension fund return estimates are too optimistic. They are not. In recent years investment revenues consistently exceeded their goals. He beat up on state employees collecting their pension by adding a Social Security benefit to their monthly amount. That’s wrong to do. State employees in pension plans don’t participate in Social Security. Worst of all, Tom suggests that pension funds should be converted to 401K plans. This is a terrible idea.

As an MSU employee, I am painfully aware of what an expensive mistake closing pensions can be. Back in the 90s the university withdrew from the pension plan and went with a 401k (or DC) system. It was an expensive blunder that we employees have been subsidizing for decades. The reason is that we have a contractual obligation to employees and retirees who paid into that pension systems. The universities and employees have been bearing that cost. Can we please learn from that mistake?

If Montana closed all pension funds tomorrow it would fall to the taxpayers to backfill hundreds of millions of dollars more per year at the start of such a change and an obligation would continue for up to 70 years. Worse, the 401K funds that Rep. Burnett touts as a pension replacement are like savings accounts. They do not provide retirement security as about 50 percent of participants outlive their benefits.

When it comes to retirement security, I would rather not have our state employees join the race to the bottom.

Montana has done a good job of managing pension funds. Perhaps my proudest accomplishment as a state legislator was carrying and passing HB 377. This bill, drafted by Gov. Bullocks team, fixed the teachers pension system. To understand how, it’s helpful to know how our defined benefit (DB) pension funds work.

In a DB system, participants (employees) pay a percentage of their salary into a pool of money. Those employee contributions are matched by the employer (the state) and the pool of money is then professionally invested and managed. When an employee has contributed to the fund for 25 years, they are entitled to a pension that is based on a percentage of their salary. They (and their spouse) are entitled to receive this payout until they die. This type of plan provides maximum security for retirees.

You can draw an analogy between a DB pension plan fund and a big tub of water with pipes leading both into it and out of it. Working employees and successful investments of the fund add water (money) to the tub while retired employees draw water from the tub. It’s necessary to balance inflow with outflow over time. Pension fund managers have to prepare for a future where (due to our longer life spans) employees will drawing out for a longer period of time. We saw that.

Montana’s pension funds needed attention for other reasons. They were doing well until the Great Recession of 2008. To go back to our tub analogy, the financial crash scooped a very large quantity of water out of the pension tub and dumped it down a drain on Wall Street. That tub has since been refilling due to continued contributions and investment success, but with the level of retirements that will occur in the future, we had to make some adjustments in order to keep the fund from running dry. We did that in 2013.

Under the new rules, new and existing employees saw their contribution go from 7.15 percent to 8.15 percent. New employees will have to contribute longer in order to qualify for a full pension. Teachers will have to have to work 30 (instead of 25) years to receive a full pension. These reasonable adjustments placed our pension funds on sound financial footing.

Despite Rep. Burnett’s “what if” assertions and incorrect assumptions, the numbers say that the sky is not falling.

Rep. Tom Woods represents Bozeman in the Montana Legislature.