JEFFERSON CITY — The assets of Missouri’s biggest public employee pension funds plunged by more than $11 billion in 2008, mostly because of the sharp drop in the value of stocks, real estate and other investments.

Parker Eshelman photo

Steve Yoakum is the executive director of the Missouri Public School Retirement System, which lost about $7.8 billion in 2008, about 25 percent of its value.

The state’s largest pension fund, the Public School Teachers Retirement System, lost 25 percent of its value, dropping $7.8 billion in the 12 months ending Jan. 1.

And although the funds’ managers have reassured their current and future retirees their benefits are secure, they also warn that last year’s financial meltdown probably will increase the amount of tax money and teacher contributions needed in the future to keep the funds on sound financial footing.

Missouri’s government-sponsored pension funds are generally conservatively managed. Most are financed well above the 80 percent asset funding level that actuaries recommend. And their benefits are locked in law.

But the ripple effect from the financial crisis on government pension contributions could put greater pressure on state and local budgets and school districts that are already under economic strain. The increased funding requirements could come at a time when tax receipts are depressed by a sour economy and governments are struggling with other public needs.

Fund managers hope a market turnaround in the next six months will take the edge off last year’s steep losses.

“We’re concerned, but we are not frightened,” said Steve Yoakum, executive director of the teachers’ pension fund. “We have seen declines in the past, and we have the staying power and were funded well enough to come through those. It should not have an effect on the benefits received by the retirees in any of the systems. But, long term, because of the nature of this decline, it’s either going to be made up with increased investments earnings in the future or increased contributions in the future, and it’s very difficult to project what that will be at this time.”

Yoakum said the teachers’ fund would need to earn about 15 percent per year for five years to recover from the 2008 downturn. “That’s one of the things I would say is possible but not probable,” Yoakum added.

The Tribune interviewed executives of the state and local governments’ biggest pension funds, which are guaranteed to provide benefits to more than 317,000 current and retired public school teachers, state workers, university professors and local government employees. They said their 2008 investment experience was the worst for a single year they had ever witnessed.

Like the teachers’ system, other funds sustained losses in the 24 to 25 percent range: The state workers’ fund was down about $1.8 billion, the local government employees’ fund about $850 million and the fund for retired road workers about $510 million.

The final 2008 accounting for the University of Missouri’s retirement fund has yet to be made, but the fund dropped by about $500 million during the nine-month period ending Sept. 30.

“This has been one of those years where, with very few exceptions, there was no place to hide,” said Rick Dahl, chief investment officer of the Missouri State Employees Retirement System (MOSERS).

Still, the funds’ executives said their funds performed better than peers or better than benchmarks and much better than the broader markets as a whole. While the Standard & Poor’s 500 Index fell 38.5 percent, many funds’ executives said they posted losses that were much lower.

“We kept our heads above water, said Bill Schwartz, executive director of the Local Government Employees Retirement System. “We are down 24 percent, but there are a lot of them out there who are a lot worse.”

Last September, MOSERS Director Gary Findlay posted a message on the agency’s Web site to ease the fears of the 100,000 current and retired workers depending on MOSERS for benefits.

“We are certainly trying to be realistic and not sugar-coating anything,” Findlay said in an interview. “The market is what it is today. The thing we are struggling with is that there is a huge amount of anger and distrust of anybody having anything to do with the financial markets.”

MOSERS’ fund was down 23.9 percent in 2008. Findlay said though he’s getting calls from journalists about the market meltdown, no one inquired in 2007 when his fund achieved an 18 percent gain.

“We are paying out $450 million a year,” he added. “Those benefits are secure. They are going to be paid.”

BENEFITS & CONTRIBUTIONS

Lora Wegman graphic

As fund managers assess the wreckage of 2008, they’ll calculate how much more money will be needed in the future to maintain benefit levels. Those calculations will be made in June at the end of the funds’ fiscal year.

Government-run pension plans rely on three components: the cost of benefits, the return on investments and contributions from government taxes or their workers to support the programs. When investment income falls short of predictions and benefits remain the same, contributions must increase to support pension benefit payments. However, when upward adjustments must be made, they are spread out over a period of years to reduce the shock to government budgets.

Most of the pension support payments come in the form of a percentage based on payroll. For example, Missouri is putting about 12.5 percent of its state payroll in its employees’ pension fund this year, about $270 million. Depending on the calculations, Findlay said, the percentage could increase 1 or 2 percentage points.

“If it goes up a percent of pay, that’s $20 million,” he said. Such contributions come out of funds that could otherwise be used for other services. Similarly, money from the state’s motor fuel tax, used to build roads, is used to support the highway workers’ retirement system.

School districts and individual teachers contribute to the teachers’ pension fund at a rate that currently is 26 percent of salary, split equally between the districts and the teachers. The percentage is scheduled to increase to 27 percent in July. The losses from 2008 would not all be recovered at once. Contributions would be increased incrementally each year for five years in an attempt to make up for the losses.

Similar pension fund support calculations will be made in the next few months by other agencies. The University of Missouri Board of Curators will get a report on the UM pension fund at a meeting later this week. Nearly 6 percent of the university’s payroll now goes into the fund — $72.2 million last year.

Nikki Krawitz, UM vice president for finance, said the university’s contribution to the fund would increase slightly based on 2008 experience, but the increase would be phased in over five years. During that time, the amount of the university’s contribution could be adjusted up or down depending on fund performance and other factors.

“The important thing to know is that the plan has been fully funded,” Krawitz said.

Lori Fleming, Columbia’s director of finance, said, “If everything else stays constant,” the city’s contribution to the police officers’ and firefighters’ retirement plans will have to increase about 2 percent during the fiscal year beginning next October. The funds’ values fell from $85.8 million to $73.6 million during the year ending Sept. 30, 2008.

“We were rather fortunate,” Fleming said. “We had a significant amount in cash.” The current budget calls for the city to contribute $5 million per year into the pension plans.

Most pension funds calculate benefits based on the number of years of service and an average salary multiplied by a percentage. For example, with state workers, the years of experience are multiplied by 1.7 percent. That calculation is applied to the average salary of an employee’s last three years on the job.

MOSERS officials said the average state worker retired after 18 years and five months at a salary of about $34,000 and received a monthly benefit of about $926.

Retiring public school teachers receive a benefit based on 2.5 percent of their average salary times the number of years of service. For those who retired between 2007 and 2008, the average annual benefit was $36,125.

“A SCARY TIME”

From the workers’ perspective, 2008 has brought into clear focus the differences between defined benefit plans accessible to public workers and defined contribution plans common for private-sector employees. Defined benefits must be paid regardless of what has happened to the fund’s assets.

Missouri has 119 government entities providing retirement benefits, most of them defined benefit plans. Individuals bear the risks in defined contribution plans, which are common in the private sector. Yoakum, director of the teachers’ retirement fund, said 65 percent of private-sector workers were covered by defined benefits plans in the 1980s, compared with about 20 percent today.

Findlay and Yoakum predicted the decline in the number of private-sector defined benefit plans will have a long-term negative impact on the country. The managers of defined benefit plans can take advantages of some investment mechanisms that cut costs and better manage investments.

“The defined contribution plans work very well for the financial service providers,” Findlay said. “They make more money off those than they do off folks like us.”

But defined contribution plans are gaining some ground in the public sector. Missouri’s defined contribution plans have increased from 27 in 1990 to 34 in 2007.

State Sen. Jason Crowell, R-Cape Girardeau and chairman of the Joint Committee on Public Employee Retirement, said he would welcome a discussion in the legislature about which is the better plan. He said “without question” the defined benefit plan is better for the retired worker.

Susie Dahl, executive director of the Missouri Department of Transportation and Highway Patrol Employees’ Retirement System, said there were a lot of losses out there.

“It’s a scary time for everybody,” said Dahl, who is Rick Dahl’s sister. “But state workers are among the lucky because those benefits are guaranteed, as opposed to those in 401(k)s whose losses are down 30 percent to 40 percent.”

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