By PHIL DRAKE | Montana Watchdog

Add another suggestion for pension reform into the mix: a cash balance plan.

State Sen. Ron Arthun, R-Wilsall, who offered the idea at the Aug. 8 meeting of the State Administration and Veterans’ Affairs committee, said he discovered the idea while reading about pension reform on the internet. Arthun said it’s being done in Kansas, and has been in place in Nebraska.

He said it combined defined benefit and defined contribution plans. “That’s why I kind of like it.”

Montana officials have been reviewing the pension system, which is now a mix of defined benefit and defined contribution plans. While some estimates put the state’s unfunded liability at $3.9 billion, others say it could be as high as $10.5 billion. Four of the eight plans administered by the Public Employee Retirement Board are actuarially sound, four are not. Another program, the TRS, has a $1.8 billion unfunded liability. The Montana Constitution requires public pension systems to be funded on an actuarially sound basis, which a state report noted has been a challenge since 2001 and the systems are now “significantly” underfunded.

Arthun said a cash benefit plan would be portable. Employees would be guaranteed a 5 percent return on their money. At the end of their career, even with early retirement, they can take that money with them. The plans are not tied into the 7.75 percent return the state now seeks.

He said he had talked with two Kansas legislators, neither of whom were totally happy with their bill.

An October 2011 study by the Omaha-based Platte Institute Policy described cash balance plans

as “defined benefit plans that mimic certain aspects of private sector defined contribution plans.” Participants are given contribution credits which earn interest. However, the employee’s real contribution is invested elsewhere and can earn different rates of interest.

In Nebraska, state employees hired since 2003 join a cash balance plan. The report notes that other states, including Montana, Kansas, Maryland and Pennsylvania have considered going to such a plan as well.

According to Platte, while a cash benefit plan may look like a defined contribution pension, it’s the employer who is the asset trustee who bears the investment risk. Cash benefit plans are more attractive to young, mobile employees and are better at retaining workers from leaving or retirement.

Andrew G. Biggs, a resident scholar at the American Enterprise Institute, notes in the Platte report that some reformers look to the cash balance plan for help in not only controlling pension costs, but in employee recruiting as well.

The plan also offers “greater financial transparency” than defined benefit plans by making rate of return guarantees easier to understand.

Girard Miller, the public money columnist for Governing magazine, said in a May 3, 2012 article that cash balance plans are sometimes known as “defined-benefit plans in drag.”

Miller notes the discount rate used for defined benefit plans assume a 7.75 percent rate of return and the minimum credit-rate guarantee of the cash balance plan is usually much lower.

“And there are fewer opportunities for employees to game the system with enhanced benefits, because the employee’s account balance is ‘what it is.’ The contributions are defined at the payroll site and everything else is left to the pension plan, not to legislative meddling or collective-bargaining abuses.”

He said positives for the plan include lower investment costs through “pooled institutional investments that are clearly less costly than the individual mutual fund accounts typically used” and pooled longevity risk “so that nobody can outlive their money.”

Miller said opponents include taxpayer groups who don’t trust the employer’s underwriting risks and the U.S. Chamber of Commerce, which “resents” political meddling in pension plans.

In late July, a subcommittee consisting of members from two Montana state panels recommended their full committees consider a proposal from the governor’s office that Gov. Brian Schweitzer said would bring reform to the state’s ailing pension systems. He said it would be done without tax increases and gives the system a surplus by 2021.

Schweitzer said he would use revenues to pay off liabilities and dip into record revenues from state lands raised through sales of natural resources such as coal, oil and timber sales.

For the Teachers’ Retirement System, he proposed taking $25 million from the state land guarantee account from natural resource development, a $14.7 million one-time only contribution from the employer and a 1 percent increased employee contribution and benefit change.

For the Public Employees Retirement System, he proposed an $18.1 million state contribution and more local government contribution, a 1 percent increase employer and employee contribution.

Officials said the employee contributions would increase under the plan to 7.9 percent for the PERS and 8.15 percent for the TRS.

SAVA will review the bill draft proposals at its September meeting. Arthun’s proposal is expected to come back to SAVA in November. However, he has requested a bill draft on his own.

On Aug. 9, the U.S. Census Bureau released its annual report on public pension plans.

Montana reported $7.8 billion in total cash and investment holdings for pensions in Fiscal Year 2011, up about 13 percent from $6.9 billion in 2010, according to the Annual Survey of Public Pensions: State-Administered Defined Data Benefit Data Summary Report: 2011.

However, the same report listed the state as having $11.3 billion in pension obligations. In FY 2010, that number was $11,065,556,000.

The report also showed the state had 75,136 people participating in its nine defined benefit pension systems. Of those 53,014 were active members and 22,122 were inactive members. There were 34,299 total beneficiaries receiving periodic benefit payments. Of those receiving benefits, payments ranged from $15,000 to $19,999, federal officials noted.

Nationally, there are 222 state-administered defined benefit retirement systems. There are 17,508,704 total members with 12,878,818 listed as active members, 4,629,886 inactive members and 34,299 total beneficiaries receiving periodic benefit payments. In all, $588 million in total payments were made, according to the report.

Nationally, total holdings and investments for state-administered pension systems increased 14.6 percent, from $2.2 trillion in 2010 to $2.5 trillion in 2011, the Census Bureau stated.