Public Pensions in Minnesota; Where the Returns Are Above Average

Liberal New Yorkers are giving a big Bronx cheer to public pension assumptions that their Minnesota counterparts defend as prudent. Here is NYC’s Mayor Bloomberg: “The actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent….” Even the New York Times is ringing the alarm on public pensions.

So if 8 percent is “totally indefensible” in New York, why is Minnesota going to assume it can make 8 percent next year—and then hike it back to an assumed 8.5% in five years? (The 2012 pension bill dropped the rate from 8.5% to 8.0% for five years and made no other changes.)

Do we have special Minnesota Dollars, perhaps Lake Wobegone Dollars, where the returns are above average?

Despite major reforms in 2010, Minnesota is still an outlier in both its pension assumptions and benefits because reality has not yet sunk in—but the combo of underfunding the system, Boomer retirements,  new GASB rules coming in 2014 and a volatile marketplace ought to make pensions front and center in the near term. 

The spread between what has been promised to public employees and what has been put aside to keep those promises is too large to cover with investment returns or current levels of on-going contributions. It will have to come from operating budgets and increased employer (taxes) and/or employee contributions. That is tough medicine for the political class. (The unfunded liability is conservatively, actuarially stated at $13.7 billion but in real dollars, it is twice or three times that amount, depending on which economist you read.)

Many of the lawmakers who understand the problem were either too busy or too afraid to take it on last session. Those who were willing to take the political heat and reform public pensions bumped up against unwilling colleagues, as well as Governor Dayton’s veto pen and a slavish devotion to the agenda of the public unions.

As I like to say with public pensions, stay tuned (and patient).