Pensions in Dire Need
We brought Andrew Biggs, an economist with AEI, to Minnesota last fall to testify at the pension commission on assumed rates of return, the sustainability of public pensions and the problems with traditional ways of measuring pension liabilities. Mr. Biggs had a column in the Wall Street Journal yesterday that brought some welcome news. He is telling reformers like us (the Free Market Institute at the Center has been working on reform) that help is on the way. He thinks some big dogs have entered the fight, including the Federal Reserve, the Bureau of Economic Analysis, and the Congressional Budget Office. They have joined academics like Biggs who have been talking to anyone who will listen that we have a much bigger public pension problem than most states want to admit—and that we have not been measuring liabilities (which are guaranteed by the taxpayer) accurately. As a result, we keep making outsized promises that we cannot keep—and these promises, when properly measured, are grossly unfair because they are well in excess of private market rates.
Minnesota’s 2012 pension omnibus bill has little to recommend it, except for a modest transparency piece that we asked for so the public can get access on the MMB website to data on pensions (thanks and kudos go to State Rep and Economist King Banaian for his assist). More on that later. The “public pension cartel” (pension administrators, retirees, pubic union lawyers, and state staff) have once again effectively dictated to legislators that no change occur even though Minnesota has an unfunded liability conservatively measured by the state’s actuaries at $13.7 billion.
Legislators are still counting on reforms made in 2010 (good but insufficient steps in the right direction if you believe in a defined benefit system). They are hoping that the markets will improve and the state will grow its way out of this deep hole. Well, Dr. Biggs says the hole is much deeper than $13.7 billion—it is twice if not three times that amount. One of the reasons is that the state assumes it will earn a whopping 8.5% on its pension investments (we call this the “magic beans” theory of investing where Minnesota dollars grow faster than other dollars in the marketplace). The 2012 pension bill has no meaningful reform of that return assumption—or the defined benefit system—because a majority of legislators, facing re-election, do not want to rock the boat. The brave exceptions on the pension commission this year are Rep. Mary Kiffmeyer and Senators Ted Daley and Roget Chamberlain. So much for leadership and a GOP majority. We hope that Andrew Biggs is right—and that help is on the way.
Kim Crockett is the chief operating office and general counsel at Center of the American Experiment, where she directs the Minnesota Free Market Institute.