Why there is no budget surplus this biennium—or this century
One of the hottest seats at the Capitol these days is at the Pension Commission. The hearing room has been packed with retirees, police officers and other public employees, union officials, and lobbyists. It’s hard to get a seat on Tuesday nights.
Sensible but modest changes to benefits are on the table, along with increases in contributions by employers (taxpayers) and employees. As always, the burden will fall heaviest on taxpayers, because pensions are run by politicians. Government unions, present on all sides of the table, out-vote taxpayers every time.
Here are a few highlights midsession:
Using the faulty assumptions that understate the problem, the unfunded liability has gone up another $2 billion, taking Minnesota’s overall deficit to $17.8 billion. The really bad girl in the bunch is Teachers Retirement Association (TRA), now $6.5 billion short
This is why there is no budget surplus this biennium, and there will never be a true surplus until this liability is paid down and pensions are no longer “off the books.”
The Governor’s “Blue Ribbon Panel” called for immediately lowering the assumed rate of return/discount rate of 7.5 percent; increased employer and employee contributions; and reduced COLAs. To ease that pain: push out the amortization period and more “state aid.”
Mansco Perry, executive director of State Board of Investment (SBI), said something important and new: that the assumed rate of return and discount rate should be determined separately. This is sage advice, not heard before from any state official.
Unfortunately, there is nothing new here. Taxpayers are already pouring an additional $117 million in cash and additional contributions into certain funds on top of annual contributions. As for dropping to 7.5 percent, that may seem bold, but Minnesota is just playing catch up with other states (and reality).
Still there is a shift in tone. Maybe after a decade of failed reforms, Minnesota’s leaders are starting to realize that make-believe returns are not going to save a pension system with unrealistic funding and benefit policies and that failing to make annual payments has robbed our future.
Retirees sit at hearings struggling to understand why their contributions were not enough. Last year, union leaders asked the Governor to veto a bipartisan attempt to do good things. That veto hurt retirees, and employees, putting off the inevitable.
The commission is trying to “save” the defined-benefit system, but like an emergency room doctor giving a blood transfusion to a dying patient, these heroic efforts will not change the long-term diagnosis. Yet if these new policies are adopted, it is going to become apparent very quickly just how sick the patient is. Generational inequities will be glaring.
Pension policy shifted long ago from “pay as you go” to borrowing from future employees and taxpayers. Almost half of the contributions go to pay the unfunded liability. In the case of TRA, the unfunded liability payment now exceeds the annual cost of current employee benefits.
If Minnesota wants to keep its pension promise, the plans must be closed and benefits reduced (no more compounding COLAs). Then, the State must use honest numbers to figure out the real liability. It will be the hardest thing Minnesota has ever done.
New employees should then be offered defined contribution plans with lots of options to attract the best employees possible in this highly mobile, modern economy. Then as employees save for their future, they can control their own destiny and own their assets.