The clock is ticking
U.S. unfunded pension liabilities exceed $6 trillion: Minnesota’s share is at least $118.7 billion.
Both Bloomberg Markets and the American Legislative Exchange Council (ALEC) agree: Minnesota’s 2016 unfunded pension liability for state and municipal employees (including most teachers) has well exceeded the $100 billion mark. ALEC says the 50 states have an accumulated shortfall of $6 trillion.
Bloomberg put the number at about $109.8 billion at the end of August, and now ALEC has released its figures at $188.7 billion. ALEC did not include the St. Paul Teachers fund because it is still technically “independent” of the state (the fund, which takes over $10 million in cash aid from state taxpayers every year admits to an unfunded liability of about $585,000; when calculated with a more reasonable risk rate, the shortfall is $1.7 million).
Given that the pension funds admit to only an unfunded liability for 2016 of about $18 billion, it is clear that the disagreement over how to calculate pension liabilities rages on unabated—and that we are not even having the same debate!
The authors of the ALEC report they used the actuarial figures reported by the pension funds but applied a more realistic risk rate to calculate the liabilities.
In case you are tempted to reject the ALEC report as the work of the “evil Koch brothers,” the ALEC report followed best practices recommended by the Blue Ribbon Panel on Public Pensions by the Society of Actuaries, the Mercatus Center and other well-regarded pension experts. The ALEC report used the U.S. Treasury bond rate of about 2.14 percent to calculate the liabilities (called a “risk” rate) instead of rates ranging from 7.55-8.5 percent used by Minnesota’s pension funds.
What if for sake of argument, we split the difference and said the unfunded liability was about $60 billion?
Would that get the attention of voters, public employees, legislators? I think the government union executives from AFSCME, SEIU and the AFL-CIO already know the math but they are keeping their members in the dark. It is too hard to explain, and everyone is hoping they will be long gone before the pension tsunami hits. Who wants to admit that the state has failed to properly manage these pension funds?
The 2017 valuations are just starting to appear on the pension commission website. So, while the legislative session is still a few months away, the pension funds and commission are busy preparing for what will surely be another very tough conversation around the health of these very important funds. And whatever they come up with will not move the needle. Until we stop digging a hole by moving new employees to defined contribution plans, the rate at which the liability grows will just increase.
I will continue to testify that this is the biggest financial problem the state faces that no one knows about—and the hardest thing we will ever fix. Why? Because more than 11 percent of Minnesotans— real people who have worked for government, or work for government now—are counting on these pensions. Minnesota has failed to make annual payments as a matter of course for more than a decade.
With every paycheck, public employees faithfully hand over a percentage of their pay, and taxpayers match or exceed that contribution. Both parties should be able to trust that the pension funds, employers and the State of Minnesota, have wisely set the right contribution rates, actually paid the full contribution each year and prudently invested the funds so when retirement finally comes, teachers, cops and the rest of our state and municipal workforce have the pension they were promised.
If that were the case, we would not have an unfunded liability no matter how you cut it.