The Free Press
The $16 billion unfunded liability in state public employee pension funds seems daunting enough but apparently brings little sense of fiscal urgency to those who can fix it.
That figure is approximately what it costs to run the entire state for a year.
The shortfall is the difference between what has been promised public employees as pension benefits and what is available to pay for those benefits. Most of the experts know the causes of the unfunded liabilities and they know the solutions for bringing these funds into balance, but political leaders seem unwilling to address either. Worse, some don't see it as a major problem even though the gap has doubled since 2006.
Larry Martin, executive director of Minnesota's Legislative Commission on Pensions and Retirement, sees the problem. He told the St. Paul Pioneer Press: "Is there a need for concern? Yes. We're departing -- significantly -- from what we think we ought to be doing."
Some 11 of the 12 public pension plans that remain open to new members are not taking in enough money to pay benefits promised.
The plans vary in the level of funding from a low of 60 percent funded for the St. Paul teacher's pension to about a 90 percent funding for the corrections employees fund. Many of the pensions had been fully funded in 2000.
The problems stem from payments into the funds that aren't sufficient to pay benefits and faulty assumptions about investment returns. At varying times, fund managers estimated returns in the 8 percent range, but when the Great Recession hit, returns were far, far below that. In fiscal year 2012, the investment return was just 2.4 percent.
The public employee plans for benefits and payments can only be adjusted by the Legislature and when the funds went south four years ago the Legislature adjusted the plan in 2010. The plans have been shored up to some extent since that time, but that progress is not much to be proud of given some of the biggest general plans are still only 75 to 80 percent funded.
The changes required employees and employers to pay more into the funds. Critics like Mark Haveman, executive director of the nonpartisan Minnesota Center for Fiscal Excellence, claims even those fixes do not put the funds on a track to be fully funded in 30 years.
There should be no real debate about when to begin fixing this problem. We should start fixing it now.
It would be imprudent to wait for the stock market to provide higher returns. That's always a possibility, but in these uncertain economic times the state should not wait for Wall Street to behave more positively.
An investment return estimate in the 8 percent range per year is unrealistic. Those who would argue for waiting for the market to get better point to an average return of 9.9 percent since 1980. That's ancient history in the life of the stock market.
Other argue that requiring employees to pay in more or reduce benefits to retirees would be breaking some sort of social contract. Others argue requiring governments to pay more may cause taxes to go up and spending to be cut.
We may have to invoke all of the above solutions.
Clearly, there will be tough choices. But the choices will be tougher if we wait years to make them.