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Missouri gets financial grade of 'C' for under-funded retirement pensions, health care benefits

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(The Center Square) – Missouri’s financial health is better than many states, but its pension obligations are reason for concern.

Truth in Accounting (TIA), a nonprofit organization committed to educating and empowering citizens with understandable, reliable and transparent government financial information, gave Missouri a “C” grade and rated it 24th out of 50 states in its latest report, “Financial State of the States 2021.”

The organization’s research found Missouri had $13.5 billion in assets available to pay $21.7 billion in bills, which resulted in an $8.2 billion shortfall. It divided the shortfall by all Missouri taxpayers. Each taxpayer would have to pay $4,400 in future taxes “for which they would receive no related services or benefits,” the report said.

TIA’s research found Missouri has $9.5 billion in unfunded pension obligations and $3.4 billion in unfunded retiree health care benefits. The organizations with the largest unfunded pension benefits were the Public School Retirement System of Missouri ($7.4 billion) and the Missouri State Employees’ Retirement (MOSERs) Plan ($6 billion), according to 2019 data.

The Show-Me Checkbook, the Missouri state treasurer’s online transparency portal, showed MOSERs’ unfunded accrued liabilities increased 4.7% to $6.8 billion in 2020. Its assets currently provide funding for 54.3% of its obligations.

“This is a classic problem,” said Michael McShane, the national director of research at EdChoice and senior fellow at the Show-Me Institute. “Basically, you have a bill that comes due too far in the future, long after many of the people figure out how much they were supposed to put into it. And they are out of public office. So there are lots of incentives to not fully fund pensions.”

On the same day TIA released its report, the Show-Me Institute published an essay by McShane, “Why We Need to Take Pension Costs Seriously.”

“These are promises we made for the future, but we need to put enough money away now and have strong incentives to put enough money away,” McShane said.

The TIA report said Missouri didn’t have enough money set aside to weather the pandemic.

“Like all other states, Missouri received federal assistance from the CARES (Coronavirus Aid, Relief and Economic Security) Act and other COVID-19 related grants which came with stipulations on how the money could be spent,” the report said. “However, the state is in poor fiscal health because it has not been properly funding its pension and retiree health care promises which places a burden on future taxpayers.”

The American Legislative Exchange Council (ALEC) found state governments’ unfunded liabilities total $5.82 trillion nationwide, an average of $17,748 per person. The total amount of unfunded other post-employment benefit (OPEB) liabilities exceeded $968 billion. OPEB includes health insurance, life insurance, Medicare supplemental insurance and more.

Recent increases in the stock market and contributions to retirement plans have strengthened some state balance sheets, according to a report published by The Pew Charitable Trusts in September. It found the gap between the cost of pension benefits that states have promised their workers and what they have set aside to pay for them dropped in 2021 to its lowest level in more than a decade. Pew estimates state retirement systems are now more than 80% funded for the first time since 2008.

“Pew found an increase in assets of over half a trillion dollars in state retirement plans, fueled by market investment returns of more than 25 percent in fiscal 2021 (the highest annual returns for public funds in over 30 years) and substantial increases in contributions from taxpayers and public employees to pension funds,” the report stated.

While good years of market growth are beneficial, McShane advocates for ways to avoid peaks and valleys in returns.

“We need to be safe and prudent with investments,” McShane said. “The problem is big returns are promised and safe investments, especially in today’s conditions, will not get that high of a return. So they’ve been investing in risky assets to chase higher returns. If 2020 goes in a different way and the crash at the beginning doesn’t turn around as rapidly as it does, you’re in a world of hurt. That could happen in the future.”

McShane admits it’s a challenge to influence legislators to allocate more funding for pensions that won’t be paid out for decades. Unlike new highways and buildings, there’s never a ribbon-cutting ceremony when a state employee receives their first retirement check.

“Truth in Accounting and Pew have been waving the flags for years, saying this problem is looming,” McShane said. “But it’s a very difficult political lift because lots of politicians want to spend money today. They don’t want to spend money 30 years from now.”