Teachers Pension, on Downward Slide, Wants to Lower Return Assumption: Admits to $9 Billion Deficit Even with Taxpayer Cash Aid

The Teachers Retirement Association (TRA), which manages pensions for the majority of teachers in Minnesota, told legislators last month that it wanted to drop its assumed rate of return from 8.5 to 7.5 percent.

TRA is the last public fund in the entire United States to assume its assets can earn 8.5%. Most public funds since 2010  have decreased assumptions to 7.5% or lower.(See NASRA survey data showing the average is now 7.36%.) MSRS and PERA also remain high at 8.0%. The big funds that set trends in California and New York are at or headed to 7.0%. (Other pension funds around the country are closing to new members, and offering employees defined contribution plans that are portable so that employees control their own assets.)

Why do Minnesota pension funds think they can earn more in the market than other state funds? What if they are wrong?

According to NASRA, “A rate set too high will understate the liabilities, undercharging current taxpayers, at the expense of future taxpayers. An assumption that is significantly wrong in either direction will cause a misallocation of resources and unfairly distribute costs among generations of taxpayers.”

TRA Executive Jay Stoffel, who has insisted, quite confidently for years that the market could make up the funds’ shortfall, quietly and quickly informed the pension commission that the TRA board supported the change. No bravado. He testified and quickly returned to his seat.

Stoffel was the executive of the Duluth teachers pension until it was merged into TRA with millions in cash from state taxpayers (nothing from the Duluth Schools or City of Duluth coffers).  Instead of being fired, he was promoted to second in command at TRA, succeeding Laurie Hacking when she retired last year.

When are we going to hold public executives accountable for results? If we ever do, I can guarantee we will get better results.

Don’t teachers and other public employees deserve basic competence from officials managing their pension?

And then there is the taxpayer (all teachers are taxpayers). Has the taxpayer been “undercharged?” Maybe not as much as NASRA suggests.

In addition to the normal contributions made by  school districts and teachers, both of the teachers’ pension funds are being propped up by taxpayer general funds in an attempt to make up for past shortfalls that started about 15 years ago. But it still does not seem to be enough.

The Duluth merger costs taxpayers about $14 million a year—and there are no plans to end the subsidy until the funds has recovered, which could take 30 years or more. TRA gets about $20-21 million a year (so the total with Duluth is about $34 million). And the St. Paul teachers pension gets about $11 million a year (and is asking for  an additional $5 million in direct cash aid this year). Pension legislation being considered proposes even more additional spending to cover increased contributions by school districts.

That is what happens when you let politicians and government unions get together to run pension funds.

The TRA is admitting to a $6 billion-dollar 2017 deficit assuming an 8.5% return. Stoffel conceded Friday that the unfunded liability was much higher (more than $9 billion) and that the fund, without big changes, was in a downward slide. We think it is at least $16 billion short (watch for my upcoming pension paper). Here is the latest TRA presentation to the pension commission.

The Center and other pension experts have been testifying since the aftermath of the 2008 financial crisis that the Teachers Retirement Association (TRA) and all the other public pension funds, have absurdly optimistic assumptions about investment returns on pension assets—and that they were not calculating their liabilities correctly. We have been attacked for our efforts but thankfully not ignored.

Here again is NASRA, “The investment return assumption us the single most consequential of all actuarial assumptions in terms of its effect on a pension plan’s finances.”

There is much more to tell, of course. Pension are not just about assumed rates of return, or discount rates. TRA’s admission does not mean it will be reformed or that pension will be better funded in 2018 or 2028, so don’t get too excited. Also, Governor Dayton vetoed a pension bill last year that would have moved the assumed rate of return to 8.0% for reason unrelated to the bill; that could happen again. But TRA’s admission that it has a problem, its change in attitude, is a small step forward.