A tremor coming from California this week could have consequences in Minnesota — and certainly will for the nation. A federal bankruptcy judge signaled that pension obligations for the bankrupt city of Stockton could be part of the restructuring plan. California’s giant public employee retirement system had been arguing that pensions should be immune from cuts, while bondholders argued that it was unfair to reduce debt payments unless all municipal debts were on the table.
No Minnesota cities are officially in bankruptcy. But soon we can expect to see signs of the enormous strain that pension obligations will impose on school districts, cities and the state. Ratings from agencies like Moody’s, which affect the costs of local government borrowing for schools, roads and bridges, are taking a hard look at pension obligations. So is the Securities and Exchange Commission, because when cities want to borrow, they are supposed to give lenders a complete financial picture — and that includes pension obligations.
Moody’s is releasing a new set of guidelines this month that is expected to triple the pension debt that municipalities have been reporting. On top of that, new reporting requirements from the Governmental Accounting Standards Board will kick in this summer, changing the way public pension funds calculate funding levels.
While these changes will give politicians heartburn, these are good developments that will give us taxpayers a better idea of what we really owe. Then, when we consider new spending, we’ll have a better idea of what we can really afford. For decades, our elected officials have been making promises that they have not fully funded. Perhaps a clearer grasp on our debt will lead to better decisions.
It’s important to get a handle on how much has really been promised — and why pension funds are underwater. Pension funding is hard to understand; pensions are managed by busy elected officials who rely on pension administrators and their boards. Public unions like AFSCME and SEIU have a strong hand in shaping pension policy even though pensions are not subject to collective bargaining in Minnesota.
Minnesota’s unfunded liability is $16.7 billion. Experts such as Andrew Biggs at the American Enterprise Institute have made a persuasive case that the number is much larger. Like Moody’s, Biggs says Minnesota’s actual debt is triple the reported amount. Pension experts are worried that we cannot close the gap.
This week, the Legislature’s pension commission set off another tremor when it recommended that state taxpayers bail out the two remaining independent teacher pension funds in Duluth and St. Paul. Another bill would impose a $5 surcharge on homeowner and auto insurance policies to infuse cash into a police and fire pension fund. This would obligate taxpayers to pay an additional $36 million a year indefinitely even though the state has its own deficit and is searching for revenue to pay for increased spending that includes a new state employee contract that raises salaries — and thus pensions.
Duluth’s pension fund is circling the drain because it has only 900 active members supporting more than 1,200 retirees — and those retirees continue to get cost-of-living increases despite the fund’s $120 million shortfall. St. Paul is in better demographic shape, but it is short $600 million. Despite these frankly predictable shortfalls, both funds asked for increases for retirees so that they get the same deal as teachers in the state fund (TRA). Meanwhile, TRA, despite a $6.2 billion deficit, asked for a break for its retirees from cuts made in 2010. This is the kind of thinking that makes taxpayers wonder what planet these folks live on.
Rather than focusing on what they actually control — what goes in (contributions) and what goes out (retiree benefits) — most lawmakers blame the Great Recession for these shortfalls. The hard truth is that the market and economy fluctuate and even crash from time to time. You have to anticipate ups and downs when designing a retirement system. Like the private sector, which long ago moved away from unsustainable guaranteed pensions, the state should offer a portable defined contribution — or 401(k)/annuity — plan to address the retirement needs of today’s public employees.
Even though this may be less appealing than a guaranteed pension, it is what we can afford.