A Report Prepared for the Legislative Finance Committee. By Stephanie Morrison, Ph.D. Fiscal Analyst

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1 PENSIONS: A STATE & LOCAL CHALLENGE A Reprt Prepared fr the Legislative Finance Cmmittee By Stephanie Mrrisn, Ph.D. Fiscal Analyst September 30, 2011

2 INTRODUCTION The typical pensin system is funded frm three surces: emplyee cntributins, emplyer and state cntributins, and investment earnings. Abut 60% f the ttal funding cmes frm investment incme, with the remainder cming frm emplyees, emplyers and the state. This reprt is an intrductin t the emplyer cntributin pensin funding mdel and the underlying plicy chices f the legislature. It will describe: the data and its surces; the mechanics f hw the mdel cmbines the data and assumptins t prduce future cst estimates and determine emplyer cntributins and liability fr all entities in the retirement system; and the state s rle in cntributing t the retirement systems f lcal emplyees. BACKGROUND The verall respnsibility fr each f the Mntana public emplyee retirement plans is held by the state. This analysis examines current funding and the surce f unfunded liability; t that end, the unfunded liability is allcated t lcal gvernment entities based f their share f current wages. This allcatin is an example f ne way GASB may require the liability t be allcated t lcal gvernment entities in the future fr accunting statements. Tw terms used repeatedly thrughut this reprt are defined as fllws: Fractinal Wage Share the unfunded liability in the June 2010 Actuarial Valuatins fr each f the retirement plans allcated by state and lcal share f wages f active members f the crrespnding system Implied Unfunded Liability the amunt f unfunded liability that wuld be the respnsibility f lcal gvernment entities if each plan s unfunded liability were allcated n fractinal wage share This apprach t examining the unfunded pensin liability uses wages as a driver f liability rather than funding r assuming exclusive state respnsibility. Given past funding f the liabilities, it is unclear hw plicy makers will chse t fund these unfunded liabilities. In the past, plicy chices have used state funding fr a prtin f the lcal liability; further details n these plicies are n pages 2 and 3. FUNDING MODEL Tw classes f data are used t determine the surce f emplyer and state cntributins, and the crrespnding verall liability. The Public Emplyee Retirement System (PERS) and the Teachers Retirement System (TRS) prvide annual reprts f cvered payrll that prvides a cmprehensive list f the state agencies, cities, cunties, and schl districts paying int the retirement system, as well as the system int which thse entities are cntributing. SABHRS data prvides the funding breakut f the varius retirements systems general funds, federal funds r prprietary funds, fr example. Cmparing these tw surces f data the cvered payrll reprts and SABHRS data allws fr the funding breakut f emplyer and state cntributins f each f the retirement systems, as well as an assciated implied liability fr each f the cntributing entities. Legislative Fiscal Divisin 2 f 11 September 30, 2011

3 CONTRIBUTIONS BY SYSTEM, SOURCE AND COUNTY The fllwing tables shws which entities pay the emplyer cntributins tday. It uses the payrll and SABHRS data t determine the FY 2010 emplyer cntributins t the varius retirement systems. The first table lays ut the data by retirement system and the secnd table lays ut the data by gvernment entity and funding surce. The underlying data and the ttal cntributins are the same in bth tables. FY 2010 Funding by Retirement System Cntributing Entities Retirement System Lcal Grand Ttal Fire $4,700,296 $10,813,494 $15,513,790 Game Wardens 3,549,229 3,549,229 Highway Patrl 3,408,906 3,408,906 Judges 1,467,782 1,467,782 MUS 7,767,469 7,767,469 Plice 5,389,088 10,983,866 16,372,954 Public Emplyees 34,457,262 82,058, ,516,260 Sheriffs 5,536, ,400 5,789,111 Teachers 43,486,832 40,044,804 83,531,635 Grand Ttal $93,570,189 $160,346,949 $253,917,138 FY 2010 Funding by Entity and Fund Surce Cntributing Entities Funding Surces Lcal Grand Ttal K-12 Federal Funds Schls (10%) 6,651,427 $6,651,427 GTB Average (25.2%) 16,761,597 16,761,597 Lcal Schls (64.8%) $43,101,248 43,101,248 Statutry Apprpriatin 16,434,813 16,434,813 K-12 Ttal 49,752,675 33,196,409 82,949,085 Lcal Cmmunity Clleges 768, ,572 Lcal Gvernment 43,048,941 43,048,941 Lcal Ttal 43,817,513-43,817,513 MUS Current Unrestricted - Educatin 30,717,350 30,717,350 Current Unrestricted - Research 1,974,169 1,974,169 MUS Other 14,307,332 14,307,332 MUS Ttal - 46,998,851 46,998,851 Federal Funds 7,002,919 7,002,919 General Funds 45,791,021 45,791,021 Other 404, ,342 Prprietary Funds 4,848,601 4,848,601 Special Revenue 22,104,805 22,104,805 Ttal - 80,151,689 80,151,689 Grand Ttal 93,570,189 $160,346, ,917,138 A prtin f the lcal liability fr pensins is funded by the state fr varius plicy reasns. A brief verview f funding requirements fr each f the retirement systems is given belw; Appendix A gives the statutry references fr the funding f the pensin systems. Legislative Fiscal Divisin 3 f 11 September 30, 2011

4 K-12 Schl funding is different than ther lcal gvernment funding, as the state has a cnstitutinal funding bligatin that is nt affrded t ther lcal gvernment entities. Thus the state funds emplyer cntributins t pensin systems thrugh separate cmpnents f schl funding which are integral t the schl funding frmula. Emplyer cntributin rates f 7.47% fr TRS and 6.8% fr PERS are paid fr by tw surces: Federal funds fr federal funded emplyees accunt fr abut 10% f the schl district payment t the pensin system. The district retirement fund is used t pay the districts cntributin t the pensin system fr all state and lcally funded emplyees. It is funded with a cunty levy that is guaranteed by the state t generate a certain level f revenue (guaranteed tax base aid r GTB). The cunties pay apprximately 72% f this prtin f the retirement fund expenses with a lcal levy and the state pays the remaining 28% with GTB. The state maintains a statutry general fund apprpriatin t pay an additinal cntributin f 2.49% fr TRS and 0.37% fr PERS. The state pays these percentages whether the emplyees wages are funded with state and lcal funds r with federal funds. Lcal Emplyer cntributin rates f 7.47% fr cmmunity clleges, 14.36% fr firefighters, 14.41% fr plice, 7.07% fr city and cunty emplyees, and % fr sheriffs are funded by lcal levies. The state maintains statutry general fund apprpriatins t pay additinal cntributins f 32.61% fr firefighters, 29.37% fr plice, and 0.1% fr city and cunty emplyees. Nte that the high percentages cntributed by the state fr fire fighters and plice evlved ver time. Original legislatin set ut smewhat lwer rates and dedicated prtins f the insurance premium tax t fund them. Fr cmmunity clleges, like K-12 schl districts, the state maintains a statutry general fund apprpriatin t pay an additinal cntributin f 2.49% fr TRS. The state pays these percentages whether the emplyees wages are funded with state and lcal funds r with federal funds. Mntana University System (MUS) Emplyer cntributin rates f 7.17% fr public emplyees, 9.85% fr teachers, 9.00% fr game wardens, and 9.85% fr the ptinal retirement plan are funded by current unrestricted and ther MUS funds. The MUS cntributes 4.72% f emplyees salaries in the Optinal Retirement Prgram (ORP) t amrtize the unfunded liability f MUS emplyees that entered TRS befre the establishment f ORP. In additin, the state cntributes 1% f ORP emplyees salaries paid with current unrestricted funds t the emplyees retirement accunts frm the general fund. Emplyer cntributin rates f 7.17% fr public emplyees, 26.15% plus 10.18% fr highway patrl, 9.00% fr game wardens, 25.81% fr judges, and 9.85% fr the university system is funded by a mix f general, federal, state special, prprietary and ther funds. Legislative Fiscal Divisin 4 f 11 September 30, 2011

5 The cntributin laws described abve are reflected in the charts belw that cmpare the state s share f retirement cntributins t the state s share f wages fr active members f the retirement system. The first pie chart shws the wages f emplyees by emplyer grup. The secnd pie chart reflects the cntributins shwn in the tables abve. FY 2010 Wages f Active Members f Retirement System University 6% 31% City 6% Cunty 9% Cmmunity Clleges 0% Fire 2% Plice 2% FY 2010 Funding f Retirement System Lcal 37% Sheriffs 3% Schls & Cps 41% 63% While the state and university accunt fr nly 37% f the wages f active members f the retirement system, the state pays fr 63% f ttal emplyer cntributins. Lcal cntributins can be detailed by cunty, as shwn in the map belw and subsequent chart. Nte that schl districts are cunted in the cunty that crrespnds t their city r twn; this is nt precise, as schl districts can crss cunty lines, but it is assumed that these effects are negligible. Legislative Fiscal Divisin 5 f 11 September 30, 2011

6 Lcal Gvernment Emplyer Retirement Cntributins by Cunty & Retirement System Fiscal Year 2010 Cunty Fire Plice Public Emp. Sheriff Teachers Grand Ttal Beaverhead 712,082 45, ,762 1,196,757 Big Hrn 534,294 66, ,388 1,575,198 Blaine 338,578 43, ,452 1,076,355 Bradwater 138,194 68, , ,906 Carbn 30,556 38, ,067 43, , ,661 Carter 66,794 13,356 52, ,042 Cascade 629, ,839 2,761, ,293 4,269,572 8,785,394 Chuteau 23, ,441 44, , ,433 Custer 77,545 80, ,831 44, ,587 1,300,886 Daniels 88,237 13, , ,843 Dawsn 29,040 60, , , ,319 1,338,924 Deer Ldge 60, , ,419 14, , ,186 Falln 63, ,755 28, , ,102 Fergus 46,498 97, ,018 54, ,126 1,413,380 Flathead 394, ,446 2,647, ,076 5,707,682 9,642,881 Gallatin 515, ,577 2,556, ,231 4,030,773 8,094,774 Garfield 237,401 7,191 66, ,064 Glacier 531,448 79,990 1,253,505 1,864,943 Glden Valley 32,935 6,233 77, ,743 Granite 113,017 20, , ,818 Hill 99,375 96, ,818 86,590 1,344,857 2,415,830 Jeffersn 481,377 77, ,554 1,109,503 Judith Basin 85,115 15, , ,662 Lake 605, ,244 1,734,750 2,515,598 Lewis & Clark 302, ,581 2,182, ,167 4,166,411 7,378,350 Liberty 99,389 19, , ,235 Lincln 37, , ,491 1,055,282 1,765,780 Madisn 475,020 58, , ,185 McCne 87,308 15,611 86, ,123 Meagher 79,740 18, , ,574 Mineral 142,884 29, , ,354 Missula 967, ,724 3,237, ,834 5,198,726 10,779,790 Musselshell 148,911 34, , ,307 Park 109,186 85, ,694 99, ,090 1,674,273 Petrleum 26,251 3,719 40,943 70,912 Phillips 205,264 35, , ,409 Pndera 219,223 48, , ,006 Pwder River 51, ,374 15, , ,724 Pwell 395,377 39, , ,931 Prairie 61,542 10,375 61, ,088 Ravalli 67, , ,286 1,988,624 3,129,977 Richland 527,182 63, ,697 1,214,156 Rsevelt 44, ,176 44,704 1,173,704 1,800,258 Rsebud 518,587 83, ,823 1,548,598 Sanders 19, ,216 56, ,228 1,081,448 Sheridan 238,808 30, , ,131 Silver Bw 251, ,867 1,349,011 79,858 1,559,965 3,574,559 Stillwater 441,959 32, ,409 1,009,749 Sweet Grass 593,944 25, , ,740 Tetn 268,875 38, , ,010 Tle 512,224 73, , ,430 Treasure 27,313 5,932 51,465 84,709 Valley 61, ,526 50, , ,722 Wheatland 71,877 30, , ,024 Wibaux 79,244 11,160 68, ,262 Yellwstne 1,187,210 1,219,322 4,296, ,825 8,771,308 15,989,673 Grand Ttal 4,700,296 5,389,088 34,771,149 5,272,784 57,829, ,962,371 Legislative Fiscal Divisin 6 f 11 September 30, 2011

7 LIABILITIES BY SYSTEM AND COUNTY PERS and TRS payrll data are matched with the SABHRS data t determine the emplyer and state cntributins t each f the retirement systems, as well as the wages f current members f the retirement systems. The assciated implied unfunded liability fr each f the systems is calculated by applying the fractinal wage share t the actuarial unfunded liability. Since these liabilities are determined using the actuarial data f the June 2010 valuatin, they are based n the same assumptins. Actual investment and payrll grwth in FY 2011, as well as changes in retirement patterns, will result in changes t the frecast liability. FY 2010 Wages by Retirement System Cntributing Entities Retirement System Lcal Grand Ttal Fire $33,160,060 $33,160,060 Game Wardens $39,435,882 39,435,882 Highway Patrl 13,035,971 13,035,971 Judges 5,686,874 5,686,874 Plice 37,398,873 37,398,873 Public Emplyees 447,344, ,435,041 1,083,779,866 Sheriffs 54,680,650 54,680,650 Teachers 690,204,711 42,726, ,931,078 Grand Ttal $1,262,789,118 $737,320,135 $2,000,109,253 Implied Unfunded Pensin Liability by Retirement System Cntributing Entities Retirement System Lcal Grand Ttal Fire $122,000,000 $122,000,000 Game Wardens $29,000,000 29,000,000 Highway Patrl 54,000,000 54,000,000 Judges (19,000,000) (19,000,000) Plice 168,000, ,000,000 Public Emplyees 536,592, ,407,385 1,300,000,000 Sheriffs 46,000,000 46,000,000 Teachers 1,469,059,480 90,940,520 1,560,000,000 Grand Ttal $2,341,652,095 $918,347,905 $3,260,000,000 The charts belw illustrate the state s share f implied unfunded retirement liability versus the state s share f wages fr active members f the retirement system. Details n the breakut between state and lcal wages and implied unfunded liability are in the preceding tables. Legislative Fiscal Divisin 7 f 11 September 30, 2011

8 FY 2010 Wages f Emplyees by Retirement System Implied Unfunded Pensin Liability f Retirement System 37% 28% Lcal 63% Lcal 72% Althugh the implied pensin liability is allcated by the same rati as wages f active members f the retirement system, the lcal share f implied liability is larger than its share f current wages because f the higher unfunded liability in the crrespnding retirement systems. The mst significant driver f the shift shwn in these charts is the relatively less funded status f the TRS pensin system. Nte that a significant prtin f the TRS unfunded liability has been amrtized with cntributins in statute and reflected in current law funding. Because much f TRS is amrtized, slutins t the current funding challenges will be mre cncerned with ther, less amrtized, prtins f the retirement system. Lcal implied unfunded liability can be detailed by cunty, as shwn in the map belw and subsequent chart. As stated previusly, schl districts are cunted in the cunty that crrespnds t their city r twn; this is nt precise, as schl districts can crss cunty lines, but it is assumed that these effects are negligible. Legislative Fiscal Divisin 8 f 11 September 30, 2011

9 Lcal Gvernment Implied Unfunded Pensin Liability by Cunty & Retirement System Fiscal Year 2010 Cunty Fire Plice Public Emp. Sheriff Teachers Grand Ttal Beaverhead 4,289, ,551 11,920,450 16,610,053 Big Hrn 8,672, ,293 26,387,766 35,640,088 Blaine 5,482, ,966 17,527,616 23,388,171 Bradwater 2,224, ,289 6,480,305 9,305,220 Carbn 793,104 1,188,491 5,425, ,606 14,720,712 22,509,771 Carter 1,076, ,520 1,507,049 2,700,433 Cascade 16,332,763 22,564,673 44,538,577 3,500, ,820, ,757,786 Chuteau 722,941 3,997, ,000 7,493,251 12,604,872 Custer 2,012,734 2,523,085 5,963, ,472 19,304,738 30,196,864 Daniels 1,421, ,762 2,514,113 4,056,857 Dawsn 753,749 1,886,353 6,515,287 1,510,034 18,156,657 28,822,080 Deer Ldge 1,564,409 3,718,244 3,757, ,632 10,809,192 19,979,242 Falln 1,981,711 4,159, ,791 7,262,576 13,648,814 Fergus 1,206,898 3,029,101 6,719, ,445 18,901,548 30,333,357 Flathead 10,239,706 12,046,908 42,615,090 4,423, ,481, ,807,130 Gallatin 13,386,569 18,690,958 41,186,634 3,421,843 99,527, ,213,597 Garfield 1,363,122 62,734 1,894,008 3,319,864 Glacier 8,669, ,839 35,484,808 44,852,491 Glden Valley 535,888 54,374 2,210,375 2,800,638 Granite 1,819, ,559 4,581,493 6,575,362 Hill 2,579,358 2,998,596 12,834, ,418 32,692,727 51,860,339 Jeffersn 4,908, ,743 14,825,462 20,410,493 Judith Basin 1,378, ,142 4,054,186 5,566,054 Lake 9,841,543 1,528,839 45,744,006 57,114,389 Lewis & Clark 7,843,247 11,988,784 35,107,368 2,993,803 95,783, ,717,137 Liberty 1,595, ,766 2,805,144 4,572,087 Lincln 1,176,720 8,546,605 1,243,101 25,824,701 36,791,126 Madisn 7,631, ,711 9,696,527 17,835,321 McCne 1,403, ,195 2,456,239 3,996,407 Meagher 1,284, ,381 2,887,381 4,332,900 Mineral 2,304, ,599 7,680,520 10,242,058 Missula 25,101,259 24,774,383 52,128,384 5,075, ,943, ,023,781 Musselshell 2,411, ,267 6,599,217 9,309,250 Park 2,834,013 2,672,542 8,062, ,708 21,336,918 35,774,592 Petrleum 425,571 32,442 1,000,707 1,458,720 Phillips 3,313, ,740 8,699,532 12,325,551 Pndera 3,542, ,237 11,986,547 15,956,285 Pwder River 1,616,846 2,611, ,471 8,139,550 12,507,639 Pwell 3,194, ,911 5,544,163 9,082,789 Prairie 990,616 90,516 1,571,438 2,652,570 Ravalli 2,089,604 13,992,998 1,825,821 53,574,855 71,483,278 Richland 8,493, ,034 17,549,358 26,594,852 Rsevelt 1,392,679 8,727, ,996 33,120,868 43,630,912 Rsebud 8,420, ,740 24,777,620 33,923,509 Sanders 601,818 5,462, ,643 15,646,802 22,205,331 Sheridan 3,848, ,275 6,906,276 11,022,210 Silver Bw 6,537,198 10,407,831 21,701, ,682 37,774,358 77,117,502 Stillwater 7,208, ,491 15,040,488 22,531,639 Sweet Grass 4,583, ,087 5,832,100 10,634,678 Tetn 4,333, ,609 12,202,920 16,872,261 Tle 8,214, ,423 8,258,765 17,117,439 Treasure 435,736 51,749 1,466,402 1,953,887 Valley 1,917,092 5,498, ,028 14,421,871 22,276,993 Wheatland 1,159, ,686 4,183,032 5,607,181 Wibaux 1,273,375 97,358 1,961,984 3,332,718 Yellwstne 30,814,993 38,010,637 69,287,541 4,500, ,082, ,695,526 Grand Ttal 122,000, ,000, ,592,615 46,000,000 1,469,059,480 2,341,652,095 Legislative Fiscal Divisin 9 f 11 September 30, 2011

10 ITEMS FOR FURTHER STUDY Update infrmatin with FY 2011 Actuarial Valuatin data Cmpare emplyer cntributins and implied unfunded pensin liability t gvernment entity ttal budget Estimate the effect n budgets f increasing emplyer cntributin Relate retirement funding and implied unfunded pensin liability t average taxable value by cunty t get an estimate f ptential prperty tax impact Estimate the general fund share under varius assumptins Analyze recent legislative changes t pensin funding; in particular, allcate estimated impact t varius gvernment entities Legislative Fiscal Divisin 10 f 11 September 30, 2011

11 FUNDING MODEL APPENDIX A Tw classes f data are used t determine the surce f emplyer and state cntributins, and the crrespnding verall liability. The Public Emplyee Retirement System (PERS) and the Teachers Retirement System (TRS) prvide annual reprts f cvered payrll that prvides a cmprehensive list f the state agencies, cities, cunties, and schl districts paying int the retirement system, as well as the system int which thse entities are cntributing. SABHRS data prvides the funding breakut f the varius retirements systems general funds, federal funds r prprietary funds, fr example. Cmparing these tw surces f data the cvered payrll reprts and SABHRS data allws fr the funding breakut f emplyer and state cntributins f each f the retirement systems, as well as an assciated implied liability fr each f the cntributing entities. Example Teachers Retirement System Funding Funding Law FY 2010 Entity System Emplyee Lcal Other Funding Surce Funding Percentage TRS Unfunded Liability TRS General Fund 541, % TRS GTB Average (25.2%) 14,391, % TRS Special Revenue 17, % TRS Federal Funds 148, % TRS Prprietary Funds 93, % TRS Other 2, % TRS Current Unrestricted - Educatin 5,872, % TRS Current Unrestricted - Research 381, % TRS MUS Other 2,160, % TRS Cmmunity Clleges 768, % Schls TRS Lcal Schls (64.8%) 37,007, % TRS Federal Funds Schls (10%) 5,710, % TRS Statutry Apprpriatin 16,434, % TRS Ttal Cntributin 40,044, % Ttal Cntributin 83,531,635 Althugh mst teachers are lcally emplyed, the state ultimately pays fr nearly half f TRS ttal cntributins. This is due t the varius plicy chices the legislature has made t increase the state s cntributin t benefits fr K-12 schls. FUNDING LAW MCA Reference System Emplyee Cntributr Lcal Other Public Emplyees Teachers Sheriffs Plice Firefighters Highway Patrl Game Wardens Judges MUS Optinal Retirement Legislative Fiscal Divisin 11 f 11 September 30, 2011