CHICAGO – Missouri’s launch of a buyout program represents a new avenue to reduce pension liabilities and depending on its outcome could provide an option nationally for local and state governments, says Moody’s Investors Service.

Gov. Eric Greitens signed legislation authorizing the Missouri State Employees Retirement System to implement the buyout program for former state employees who are fully vested but not yet retired. The fund launched the program on Sept. 5 so it’s unclear how many former employees will participate by a Nov. 30 deadline and how much the state stands to save.

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“To the extent they are accepted, the pension buyouts will reduce the State of Missouri's balance sheet leverage stemming from unfunded pension liabilities,” Moody’s said in a special commentary published Thursday.

The program offers eligible former employees a discounted, but immediate lump sum payment in exchange for giving up their future pension benefits. Lump-sum distributions will reduce the state's liabilities for each former employee that accepts the offer by 40% based on MOSERS’ discount rate assumption.

MOSERS said 17,500 former employees are eligible for the buyout and the goal is trim $100 million off the fund’s net plan liability.

While Missouri's pension pressures pale comparison to some other states, unfunded liabilities and contribution requirement rose to a record high based on its fiscal 2016 actuarial valuation and its $3.9 billion unfunded liability is a high for Missouri. Contributions have risen to 19% of payroll compared to 10% in 2001. Based on Moody’s assessment applying differing actuarial figures to calculation, the state is carrying an $11 billion adjusted net pension liability.

“Missouri’s move to offer buyouts adds yet another strategy to the list of rapidly emerging pension reform efforts nationally” that have included attempts to reduce future benefit accruals for current employees and/or trimming pension cost-of-living adjustments, Moody’s said.

Pension buyouts have not gained widespread momentum to date among state and local governments, but “Missouri’s experience with its buyout program in the coming months could signal whether other states and local governments may attempt to follow suit,” Moody’s said.

“The substantial savings potential for governments from buyouts acts as a strong disincentive for vested employees to accept them, particularly since accrued state and local government employee pension benefits typically enjoy strong legal protections against impairment,” Moody’s notes.

While Moody’s may not consider Missouri’s pension situation overly burdensome, Missouri Treasurer Eric Schmitt has been warning that pension funding is at a crisis level.

“This crisis is no longer on the horizon, it’s at our doorstep. We owe more on pensions than we owe on state bonds,” Schmitt told lawmakers during a hearing this week, warning that unfunded liabilities have risen to $5 billion and the system is just 60% funded. He has suggested that lower investment return assumptions are needed, fees must be lowered, and the state might need to pump more funding into the system.

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