Report from the Pension Front: Minnesota’s Pension Principles

The pension commission is meeting in Saint Paul during the interim, wisely taking advantage of the quiet before the session starts up next February. One of the topics last week was “review and reconsideration of the Commission’s Principles of Pension Policy.”

If you take a quick look, you will find that, as Senator Sandy Pappas observed, the “Principles” are really a mix of policies and principles—and many of the principles contradict one another. That confusing mixture provides insight into why pension policy is at war with itself, the employees it is supposed to serve and the taxpayers who have to fund it.

 

Just before I testified on the Principles, I passed Sen. Jeff Hayden (DFL-Mpls), one of the friendliest people around the Capitol, as he was dashing from the hearing—and looked happy to be making an exit. I joked with him that if the state offered a defined contribution-style retirement plan instead of guaranteed defined benefits, he would not have to suffer through pension hearings. When I say that hearings can be dry, I mean slap yourself and read it for the tenth time and still not understand it dry.

I do not know if Sen. Hayden got my lame attempt at humor but I offered it again to the commission as a way of pointing to the absurdity of legislators running a public pension fund. These are by and large really bright, good folks—and this is a terrible use of their legislative time because no matter how hard they try, they will never be very good at it.

I went on to note that one of the principles is a preference for defined benefit plans.

Accepting that preference for the sake of argument, I pointed to another principle—the bedrock of the system though it’s buried on page 3—on pension plan funding. “There should be utilized a financing method that will distribute total pension costs fairly among the current and future generations of taxpayers and that will discourage unreasonable benefit demands.” It goes on to allow for funding on an actuarial basis –and on a current basis.

This means that any unfunded liabilities should be small and manageable like an actuarial hiccup —with a plan to pay them off quickly so that the generation of employees and taxpayers enjoying that government job/service covers the cost. It is a matter of simple fairness to the generation coming up behind you. It also means you have to pay for the benefit so if you want it to be higher, you have to pay more from your paycheck and elected officials have to pay more from their budgets.

Instead we have a very large, hard to manage unfunded liability. We are told not to worry—we have thirty years to pay it off. That’s because one of the other “principles”—one I would call a bad policy and a good candidate for revision– is that pension debt can be amortized over a period not to exceed thirty years. But we do not even follow that policy because Minnesota allows that amortization period to be reset (kind of like when we re-finance our mortgages), thus pushing todays costs even further onto future generational shoulders. It is like a jumbo mortgage balloon payment that never gets paid.

Do taxpayers thirty years from now get to vote on this? No but they get to pay for it. That is what we call “taxation without representation.” These pensions are not like bridges or other long term assets where future generations can be fairly assessed.

New numbers will be published by January but the current unfunded liability is $17 billion. National experts say that Minnesota should double—or even triple that number because our assumed rate of return at 8.0%–8.5% is pure fantasy.

So my testimony was, if we are going to offer a guaranteed defined benefit to local and state employees—and take their money each paycheck and match it with taxpayers dollars—then we better be putting enough away to meet the promise. But we do not that. Minnesota has not paid the minimum amount that our actuaries tell us to pay since at least 2008. For example, last year the total requirements for all plans was about $2.394 billion but only $1.962 billion was paid—leaving a shortfall of $431,932,129.  And that is just the shortfall for 2012. So much for a “balanced state budget.” But recall that pension debt is “off the books” for balance sheet purposes. (That is another state policy that must change.)

You can see how we got to a $17 billion shortfall pretty quickly when you consider that we are not paying in the full requirement and yet we are still paying out generous pensions with a COLA that compounds every year, thus increasing the base pension amount. Add in a volatile stock market and you have a fiscal crisis.

Which gets me to another good pension principle that is just an extension of the idea that you have to currently fund what you promise. That is, “no proposed increase in pension benefits…should be recommended ….until there is established adequate financing to cover the (cost). “

This is one of those “duh” moments so you would think the principle would be followed strictly. And yet the funds have been in big trouble since 2008 but we are still paying a COLA –and it is set to go up again if and when they reach 90% funding status.

Last session, the commission recommended and the legislature passed an increase in the COLA for the Duluth and Saint Paul teachers’ funds as part of a bail-out package. That is right. The funds are upside down and needs taxpayer general funds to stay afloat—and they granted an increase in the benefit. All that is a prelude to a merger of the funds into the state teachers plan.

Recall that private pension funds, to the extent they still exist, do not typically feature COLAs, though Social Security has a CPI escalator.

Finally, another principle that I liked was “(p)ublic pension plan activities should be conducted in accord with strong fiduciary responsibility standards and regulation….Failure to conduct ….activities in accord with the [same] should be subject to appropriate fiduciary breach remedies.”

I told the commission that I did not know if that principle had ever been applied—as it seemed to suggest that someone is supposed to be held accountable for this terrible breach in the fiduciary duty of one generation to the next.

Who do we hold accountable? It is simple in a democracy: our governor and state legislators. Let’s start with the pension commission members. You can find them all, with a click, right here.

 

Cross-posted at Center of the American Experiment