With the exception of teachers in Duluth and St. Paul, Minnesota public school teachers all save for retirement by making contributions to the Teachers Retirement Association (TRA). Taxpayers also contribute as part of an overall benefit package.
The state is considering a request from the Duluth teachers fund to merge into TRA. Duluth’s fund is underwater, upside down and in dire need of some kind of fix. The Duluth teachers fund has only 873 active members to support 1,445 retirees, the disabled and survivors. It is only 54 percent funded, with a shortfall of at least $162 million. It is getting $6 million in state tax dollars this year while the merger is considered. Actuarial estimates say TRA would need $14.7 million a year — on top of the contributions from members — to make the fund whole following a merger.
I urge the state to hold off on a merger at this time. The reason is that the estimate for how much the Duluth fund needs to keep its promises is understated — perhaps significantly. If the goal is to keep the promise of a secure retirement to teachers, we need to slow down and get the number right.
The St. Paul teachers pension is also in tough shape but its board voted to remain “independent” while receiving an infusion of state dollars ($10.6 million in 2013). We could, however, see a merger in the near future that has been estimated to require $46.4 million annually. That would just about complete a trend of consolidation of troubled funds into the state pension system.
So long as the pension funds are made whole, consolidation seems like a prudent move. So what’s the problem?
Public pension funding has been the subject of heightened scrutiny since the markets tumbled in 2008. Economists and pension experts from all over the country have been diligently analyzing why the public pension sector was so vulnerable and why it has not recovered despite record gains in the stock market.
Minnesota has responded with tweaks in contribution rates, benefits and COLAs in an attempt to turn things around. Yet, TRA and the other funds remain in trouble. TRA only has about 77,000 paying members supporting more than 57,000 retirees, the disabled and survivors. That ratio is not great — and it’s only 72 percent funded with a shortfall of $6.6 billion for 2013. Over the last three years, TRA has been short on required contributions by a stunning $568 million. TRA is in better shape than Duluth but that does not mean it is in good shape. TRA itself is getting about $20 milllion a year in state aid. It is certainly not in a position to subsidize merged funds.
Why do I say subsidize? Wouldn’t TRA be made whole if there was a merger?
A new study offered by the Rockefeller Institute of Government (a public policy research arm of the State University of New York), should be required reading for every teacher in Minnesota. The report, aimed squarely at saving defined benefit plans, describes public pension funding as “deeply flawed” and “inaccurate.”
The report argues that the “major significance of valuing liabilities incorrectly is that it leads to inadequate funding policies, and encourages the mistaken belief that benefits can be greater, services can be greater or taxes lower while still funding benefits securely.”
In other words, we are fooling ourselves. The benefits Duluth and TRA have promised are not even close to funded.
We use our assumed rate of return (8.5 percent) to calculate our liabilities “even though there is no logical connection between how much is owed to workers and what asset will earn.” This means that it will take a lot more than $14.7 million a year from state taxpayers to make TRA whole if it merges with Duluth.
This valuation error, according to the report, “mask(s) the true costs of pension benefits and encourages underfunding, undercontributing and excessive risk-taking trapping pension administrators and government funders in potentially destructive myths and misunderstanding.”
These myths and misunderstanding are fully on display on the TRA website which offers a “quiz” replete with cartoons and jokes, called “What’s Your Pension IQ?” The quiz, which leads teachers by the nose to conclude that TRA pensions are good and safe while private sector plans are bad and inadequate, makes misleading claims about the financial health of these funds, the risk taxpayers face and openly campaigns against any kind of reform.
The TRA website is a state website funded by taxpayers. And by the way, the former executive director of Duluth’s fund for 22 years, Jay Stoffel, is slated to become the new director of TRA when the current director retires.
So what should be done?
Duluth’s teachers have contributed to the pension fund in good faith, assuming that fund managers made the right calculations. Something has to be worked out so that the promises are kept but the details should be carefully considered before TRA takes on any additional liabilities. Right or wrong, no one is looking to the Duluth schools for cash. The assumption is that state taxpayers and TRA members will come to the rescue. Given that assumption, the Duluth COLA should be eliminated to preserve assets while the state considers all options, including a shift of current and new teachers into a defined contribution plan similar to what college professors enjoy at our state universities. That would be a prudent plan that recognizes the reliance of Duluth’s retiree’s while better controlling the risks for TRA members and state taxpayers.
So, now what’s your pension IQ?
Kim Crockett, COO and General Counsel at Center of the American Experiment, frequently testifies on public pensions at the state Legislature.