Both
Bloomberg Markets and the American Legislative Exchange Council (ALEC) agree:
Minnesota’s 2016 unfunded pension liability for state and municipal employees
(including most teachers) has well exceeded the $100 billion-dollar mark. ALEC
says the fifty states have an accumulated shortfall of $6 Trillion. And that’s
just for pensions. There are other retirement benefits like healthcare that are
unfunded, too but I will save that bad news for another day.
Bloomberg put the number
at about $109.8 billion at the end of
August, and now ALEC has released its figures at $188.7 billion.
ALEC did not include the St. Paul Teachers fund because it is still technically
“independent” of the state (the fund, which takes over $10 million in cash aid
from state taxpayers every year admits to an unfunded liability of about
$585,000; when calculated with a more reasonable risk rate, the shortfall is
$1.7 million).
Given
that the pension funds only admit to an unfunded liability for 2016 of about
$18 billion, it is clear that the disagreement over how to calculate pension
liabilities rages on unabated—and that we are not even having the same debate!
(And, for you pension geeks, that GASB 67 and 68 have not had the impact
reformers had hoped for.)
ALEC
used the actuarial figures reported by the pension funds but applied a more
realistic risk rate to calculate the liabilities. I spoke to the author at ALEC
this morning.
In case you are tempted
to reject the ALEC report as the work of the “evil Koch brothers,” the ALEC
report followed best practices recommended by the Blue Ribbon Panel on Public
Pensions by the Society of Actuaries,
the Mercatus Center and other well-regarded pension experts. The ALEC report
used the U.S. Treasury bond rate of about 2.14% to calculate the liabilities
(called a “risk” rate) instead of rates ranging from 7.55-8.5% used by
Minnesota’s pension funds.
What
if for sake of argument, we split the difference and said the unfunded
liability was about $60 billion? (I think $18 billion should, as well, but it
has not thus far.)
Would
that get the attention of voters, public employees, legislators? I think the
government union executives from AFSCME, SEIU and the AFL-CIO already know the
math but they are keeping their members in the dark. It is too hard to explain
and everyone is hoping they will be long gone before the pension tsunami hits.
Who wants to admit that the state has failed to properly manage these pension
funds?
The
2017 valuations are just starting to appear on the pension commission website.
So, while the legislative session is still a few months away, the pension funds
and commission are busy preparing for what will surely be another very tough
conversation around the health of these very important funds. And whatever they
come up with will not move the needle. Until we stop digging a hole by moving
new employees to defined contribution plans, the rate at which the liability
grows will just increase.
I
will do my duty and testify once again that this is the biggest financial
problem the state faces that no one knows about—and the hardest thing we will
ever fix. The police union will once again line up behind the testifiers as if
to say, “don’t do anything to mess with my pension.”
Why is this so darned
important and arguably the biggest failure of state government ever? Because
over 11% of Minnesotans–real people who have worked for government, or work for
government now—are counting on these pensions. As you can see below, Minnesota
has failed to make the annual payments as a matter of course for more
than a decade. (Chart is from my “Keeping the Promise” pension
publication.)
(Link
to website for chart)
With
every paycheck, public employees faithfully hand over a percentage of their
pay, and taxpayers match or exceed that contribution. Both parties should be
able to trust that the pension funds, employers and the State of Minnesota,
have wisely set the right contribution rates, actually paid the full
contribution each year (see above) and prudently invested the funds so when
retirement finally comes, teachers, cops and the rest of our state and municipal
workforce have the pension they were promised.
If
that were the case, we would not have an unfunded liability no matter how you
cut it.
