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Missouri's $5 Billion State Pension Underfunding Shows Results of Faulty Accounting

Yesterday, Missouri State Treasurer Eric Schmitt announced that the state’s public employee pension plan was underfunded by $5 billion. That is an eye-popping amount, but the story is a sadly familiar one:

The treasurer placed blame on the retirement issue on past administrations for what he said were unreasonably high expectations of investment earnings. Schmitt said returns have been below predictions for 16 of the past 17 years.

According to data from the Missouri State Employees’ Retirement System, investment returns have averaged close to 7 percent over the past 20 years. Returns have been lower in recent years, averaging close to 4.5 percent over the past 10 years and less than one percent over the past 3 years.

That scenario, of overly optimistic investment return projections, has played out around the nation, resulting in shortfalls when those returns fail to materialize on a consistent basis.

For politicians, such rosy projections mean more taxpayer dollars to spend elsewhere, as they create the illusion of the state’s pension contribution obligation being lower than it actually is.

But the can only be kicked down the road so far. Schmitt told state lawmakers that the state will need to increase its employer contribution by $15 million to $30 million in the next year to help get the pension system back on its feet.

However, the state catching up to its pension contribution now doesn’t mean that taxpayers won’t be on the hook again in the future. Pension managers should calculate the state contribution using a discount rate based on a more conservative investment return projects, such as the 4.5 percent Missouri has achieved recently.

Furthermore, they should look for ways to shift away from a defined benefit system, which can translate into high liabilities for state taxpayers, and enroll new employees in either a defined contribution or hybrid system.

Finally, lawmakers should require state pension managers to focus solely on increasing returns and maintaining pension plans’ financial health, and not use pension funds to advance political agendas that have nothing to do with securing public employees’ retirement.