Pension Funding: the Pension Problem Will Return, Again

I write a column now and then for the Lakeshore Weekly News called “The Conservative Take.” It appears in the newspapers you find at the grocery store or gas station. We like the forum because we get to reach a lot of people who might not otherwise read Center publications.

Recently, to honor our K-12 school teachers, I wrote about the perilous state of their defined benefit pensions, saying that even if the Governor signs the pension bill, lawmakers would be faced with a funding crisis in the near future. That may seem like a lousy gift to give but I cannot think of a nicer thing to do for teachers who are counting on these pensions in retirement. They get a lot of misinformation and happy talk from Education Minnesota, their union.

I could have written the same column about the other major pension funds (MSRS and PERA). The teachers funds are in worse shape but none of the funds is in good shape.

As of this updated writing, the 2018 pension bill has not been signed by Gov. Dayton even though he was part of the negotiations and said he would sign it. He has vetoed every other major bill (see nearby). The best thing about the bill is that it lowers the assumed rate of return to 7.5% but as I explain below, that is still much too high.

Here is my recent column, Crockett: The teacher pension problem will return again.

This is National Teacher Appreciation Week, when we can take time to thank the people who educate our children and help us turn them into productive citizens.

This week is also when the House takes up the pension bill. All the pension funds from MSRS (state employees) to PERA (local government) face strong financial headwinds but the teachers’ funds (TRA and St. Paul) are in especially tough shape. How could that be in a state that enjoys widespread support for education? Teachers rely on elected officials to get this right, but, unfortunately, politicians are not very good at running pension funds.

Everyone finds pensions boring but not having enough money in retirement is anything but boring, so all eyes on the board.

First a little history. In 2009, following the financial crisis, Minnesota reported an unfunded pension liability of about $15 billion for all funds, with 76 cents on the dollar to pay promised benefits. Over $5 billion of that was from the Teachers Retirement Association. In 2010, the Legislature passed what was sold as “comprehensive reform.” The state raised contribution rates, increased cash aid and reduced the cost of living increase (COLA) for retirees.

But here we are in 2018; the funds are still dangerously below full funding even after a decade of record stock market returns — with a larger shortfall. Experts disagree on the size of the deficit but using the state’s optimistic assumptions, it’s about $20 billion. Using more realistic assumptions, it’s $40-$60 billion.

Lawmakers have worked hard to agree on a rescue plan, especially for the Teachers Retirement Association. TRA says it only has 70 cents on the dollar to pay teacher benefits and a $9 billion unfunded liability; in the defined benefit world, this is a crisis.

The pension bill, which Gov. Mark Dayton supports, is expected to become law though some lawmakers are stunned at the growing expense. Pensions are supposed to be covered by employer and employee contributions that are then invested by the state, but Minnesota stopped paying the full cost of pensions in the early 2000s. Imagine if you did that with your mortgage and then tried to catch up to avoid foreclosure.

As in 2010, the pension bill raises contributions and l owers the COLA but it also does something lawmakers should have done in 2010. It lowers how much the state assumes it will earn investing pension assets (to 7.5 percent) which in turn requires higher contributions. By contrast, many states assume they will earn less than 7 percent, or have moved employees into 401-K type funds. Private sector pensions, to the extent they still exist, assume they will earn between 2 percent and 4 percent. So even with this latest reform, Minnesota is still not putting enough aside.

Today’s younger teachers pay more than retired teachers did, and about half their contribution goes to an unfunded liability. TRA gets cash aid of over $34 million a year from state taxpayers, and under the bill, school districts will get cash to cover increased employer contributions ($60 million in the next biennium). The teachers’ union, however, negotiated to delay the teachers’ contribution increase until 2024. Lawmakers familiar with TRA say this is a mistake given TRA’s severe deficit.

I have warned lawmakers, most of whom do not understand pensions, that pensions will be back in front of them soon, with the same if not more severe funding shortfalls. I wish I had a more encouraging message this week for teachers but hope this warning is taken in the spirit offered; one of great appreciation for how important it is that teachers have a secure retirement.

Kim Crockett is vice president and senior policy fellow at Center of the American Experiment, a public policy organization based in Golden Valley, and Director of Ed