Lawmakers were jolted Wednesday morning when Missouri Treasurer Eric Schmitt told them that a large state pension plan has continued to weaken financially.
Ten years ago, the Missouri State Employees’ Retirement System (MOSERS) reported that it had enough money to cover about 79 percent of the future benefits it has promised to pay. Schmitt and others consider 80 percent to be a sign of a stable pension, though 100 percent funded is obviously an even better place to be.
As of July 2016, MOSERS had dropped to about 69.6 percent funded. And over the last fiscal year, the news has worsened.
Schmitt said Wednesday before the Joint Committee on Public Employee Retirement that MOSERS’ status has continued to sink. He said the funded ratio had dropped to 60 percent — although that number could be misleading.
In citing the 60 percent funding level, Schmitt was referring to the market value of the pension plan’s assets, what they would be worth today.
In previous annual reports, MOSERS — like many other pension plans — has used a different figure, called the actuarial value, a “smoothed” number used for long-term planning to account for stock market volatility.
The most recent actuarial value of MOSERS assets, which allows an apples-to-apples comparison to previous performance, also shows a drop, though to a less-severe ratio of 67.5 percent funded.
“We believe the market value is a more accurate reflection of the system’s status,” said Garrett Poorman, a spokesman for Schmitt’s office. “… Although the smoothed figure is sometimes used by others, the treasurer has consistently referred to the market value figure in alignment with widely accepted governmental standards.”
Poorman provided a new report showing both figures, with the market value at about $7.9 billion and the actuarial value at $8.9 billion.
“Neither the market value of assets, representing a ‘cash-out’ value of System assets, nor the book values of assets, representing the cost of investments, may be the best measure of the System’s ongoing ability to meet its obligations,” the report says.
At any rate, the data shows MOSERS continues to see its liabilities outpace its assets and continually fails to realize its investment projections. As a result, state-supported MOSERS is staring at an unfunded liability of more than $4 billion.
Schmitt’s message to state lawmakers on the pension committee was that drastic change was needed to right the ship and prevent MOSERS’ problems from affecting the state’s credit rating.
He blamed unnamed officials from years past with consistently overestimating the revenue MOSERS would reap from its investment portfolio, which allowed the state to kick in less money to fund pensions for state employees.
“Past administrations have tried to keep the MOSERS contribution rate low by artificially inflating the MOSERS assumptions,” Schmitt said. “The time for sugar coating this problem is over.”
The report provided by Poorman shows the contribution rate rising over 20 cents per dollar for the first time in the pension’s history as of late June.
Instead of adjusting investment return rates, MOSERS kept its target among the highest in the nation, and as a result, MOSERS missed its assumptions in 16 of the past 17 years, he said.
In his critique of MOSERS’ investment strategy, Schmitt also pointed out the massive investment fees paid by the pension plan.
When compared to another large Missouri pension, the Local Government Employees Retirement System, MOSERS has routinely paid out more investment fees relative to portfolio size. In other words, MOSERS has gotten less bang for its buck when it comes to investing.
LAGERS and MOSERS were at similar funding ratios in 2011. But since then, while MOSERS has dropped into the 60 percent range, LAGERS has shot up to nearly 95 percent funded.
Schmitt said an outside analysis also MOSERS’ investment fees relative to its size to be among the highest in the nation.
Over the past 10 years, MOSERS has paid out close to $1 billion in investment fees, according to a News-Leader analysis.
What’s more, according to the Center for Retirement Research at Boston College, MOSERS has dramatically increased the percentage of its portfolio in alternative investments, such as hedge funds. The percentage of MOSERS investments in alternatives increased from 25 percent in 2012 to 62 percent in 2016.
Most of the money MOSERS has invested is in the U.S., Japan and United Kingdom, with smaller amounts invested in dozens of other countries including China, India, Russia, Mexico, the United Arab Emirates and Qatar, according to data provided by the pension in February.
The committee’s chairman, Sen. Rob Schaaf, thanked the treasurer for drawing attention to the problem and said the committee wanted more information from state pensions including information on investment fees and reasonable rates of investment return.
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