The scandal vanishes
It’s been nearly a week since the FBI raided the offices of the Minnesota nonprofit Feeding Our Future. Since then, there have been no further developments in the case. Could…
We at the Center of the American Experiment have been warning about the funding shortfall for Minnesota’s government pensions for a long time. A new report by Bloomberg shows that due to new accounting rules, Minnesota’s debt to its workers’ retirement system has soared by $33.4 billion to a whopping $109.8 billion. That is $19,891 for every Minnesotan.
As Bloomberg explains
The Governmental Accounting Standards Board’s rules, ushered in after the last recession, were intended to address concern that state and city pensions were understating the scale of their obligations by counting on steady investment gains even after they run out of cash — and no longer have money to invest. Pensions use the expected rate of return on their investments to calculate in today’s dollars, or discount, the value of pension checks that won’t be paid out for decades.
The guidelines require governments to calculate when their pensions will be depleted and use the yield on a 20-year municipal bond index to determine costs after they run out of money.
The Minnesota’s teachers’ pension fund, which had $19.4 billion in assets as of June 30, 2016, is expected to go broke in 2052. As a result of the latest rules the pension has started using a rate of 4.7 percent to discount its liabilities, down from the 8 percent used previously. As a result, its liabilities increased by $16.7 billion.
In Minnesota lackluster returns and years of shortchanging have taken a toll. The state’s pensions lost 0.1 percent in fiscal 2016.
But other factors also helped boost Minnesota’s liabilities: Eight of Minnesota’s nine pensions reduced their assumed rate of return on their investments to 7.5 percent from 7.9 percent, while three began factoring in longer life expectancy.
Minnesota funds its pensions based on a statutory rate that’s lower than what’s need to improve their funding status. School districts and teachers contribute about 85 percent of what’s required to the teacher’s pension, according to S&P Global Ratings.
“It’s woefully insufficient for the liabilities,” said Lenczewski, the director of Minnesota’s legislative commission on pensions. “You just watch this giant thing decline in funding status.”
Minnesota has a gone from having 80% of what it needs to cover promised benefits to having just 53%. Our state has gone from having one of the best funded state systems to the seventh worst. “It’s a crisis,” according to Susan Lenczewski, executive director of the state’s Legislative Commission on Pensions and Retirement.
According to Kim Crockett, our resident pension expert, the Bloomberg article, while a welcome sounding of the alarm, gets some of the details about Minnesota wrong but the overall thrust of the story—that we are in big trouble—is correct. Kim will have a more detailed report on this next week.
John Phelan is an economist at the Center of the American Experiment.