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Moody’s Warns Minnesota: 2018 Pension Bill Not Good Enough

In case you do not read the Star Tribune, or missed today’s headlines, the front page had an article entitled. “Is Pension Reform Just Plugging the Dike?”

Rating agencies like Moody’s, Fitch and Standard & Poor’s, have all threatened to ding the State of Minnesota for not properly funding pensions. This is what finally prompted the Governor and Legislature to act in 2018 (Dayton had eight years to do it but waited until his second to last year to start to address the growing unfunded liabilities, and then his last year to sign a bill).

Credit rating agencies Moody’s, Standard & Poor’s and Fitch have all weighed in on the 2018 legislation. Pension liabilities are one of the things such agencies evaluate when they look at the state’s financial health and determine its bond rating; a higher bond rating saves the state money by allowing it to borrow at a lower interest rate.

Moody’s released yet another report critical of Minnesota policies, noting that the Omnibus bill was “far from a cure-all.”

The Strib article conveyed the truth, which is that the much-praised pension omnibus bill signed by Gov. Dayton this spring, was not, contrary to claims by bureaucrats and politicians who run the funds, the “fix” needed to fund the promises made to teachers and other public employees.

The article properly conveyed that the pension funds are still in significant trouble, and that the teachers’ funds in particular are facing big headwinds.

Teachers Retirement Association will see a 20 percent immediate reduction in its unfunded liability under the legislation, Moody’s estimated. But the agency said even with that change, the unfunded liability will still total about 150 percent of payroll, roughly twice what it was a decade ago.

The problem with the article is that the Strib reporter relied on union executives and union lobbyists who help shape pension policy, and even the current TRA pension fund director who had to merge the Duluth teachers pension into TRA because it was in such bad shape after decades under his leadership. It did not seek independent sources, or outside experts who could offer a different perspective.

If they had called me, I would have added this: the pension system only works for people who make a career of teaching or some other public employment. Most teachers and other employees, do not stay for the 30 years required to get the good-paying pensions. As a result, they have very small pensions compared to the retirement savings they would have from an individually -owned 401(k) or 403(b). We should be talking about that, too. And how to get teachers the information they need to feel confident about savings options.

As a result, the article regurgitated the same old data that Governor Dayton and the funds used to make the pension bill sound like a bigger achievement than it really was. Data that is simply not accurate, such as the claim that the unfunded liability is only about $16 billion. (This number, long discredited, uses overly-optimistic assumptions about assets and liabilities. The number is closer to $40-$60 billion or more, which is in another universe of debt than a mere $16 billion.)

We are pleased that the newspaper reported that rating agencies continue to warn Minnesota that it has much more work to do on pensions, and that if it does not reform pensions, Minnesotans will pay more to borrow money for building schools and building roads. But it would be better if reporters did not rely on biased sources for articles, especially union officials and politicians who cut the deal.

Then we could perhaps convince elected officials that they are not very good at running retirement systems, and that it is time to do something very different. But first voters and public employees need good information.





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