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North Dakota public pensions on firm footing for now

While sagging public pensions in states like Illinois now resemble earth-bound, budgetary comets, North Dakota pension plans aren’t likely to sink anytime soon.

At least, that’s the goal behind a set of legislative changes now being weighed to head off future disruption to one of the state’s largest pension funds, the North Dakota Public Employees Retiree System -- NDPERS, for short -- which could otherwise run dry in decades to come.

Sharon Schiermeister is chief operating officer and interim director of NDPERS. She’s a 36-year employee of the agency that currently covers about 46,000 members, more than 11,000 of whom are retired.

Pension planning is a long-term business, meaning today’s North Dakota pensioners won’t have to worry much about seeing their benefits evaporate.

But, as the plan’s governing board looks to actuarial projections of its investment, there’s cause to wonder what pensions might look like 40 years down the line. If the plan goes uncorrected now, board members believe, it could be gone by then.

“The sense of our board is, as fiduciaries of the plan, that we need to act as soon as possible to make sure the plan is heading toward fully funded status,” Schiermeister said.

The immediate term for NDPERS is sound, she added, meaning there’s no cash-flow crisis on the near horizon. That’s not to say there’s no sense of urgency though.

Sen. Dick Dever, R-Bismarck, a member of the pension board with a long history of involvement with the state’s benefits programs, said the group is concerned with the fund’s lack of sustainability.

“It’s like Social Security in that it’s going broke at some point,” Dever said.

To avoid that fate, the board is preparing some possible bills to give legislative options on how to fund the pension plan into the far future. That’ll require them to avoid cutting benefits for people who are already retired while being mindful that, for the public sector, retirement benefits are typically a recruiting tool to make up for the fact that private workplaces often feature higher average salaries.

The plan’s investment portfolio works best when allowed to sit and collect compound interest over the years of a future pensioner’s career. Though it’s not vital to be able to pay off the entirety of the plan’s obligations immediately -- after all, benefits go out as workers retire, which isn’t all at once -- the board has a goal of slashing the existing disparity between its assets and its liabilities, which, in this case, are the benefits owed to NDPERS members.

Right now, there’s plenty of space between the two.

Paying our due

At the end of the plan’s 2017 fiscal year, which wrapped up June 30, NDPERS had assets worth $2.5 billion stacked against a total liability of $3.6 billion. The difference makes up what planners call the unfunded liability, or the chunk of benefits that will be owed to pensioners later on.

In 2001, the plan was fully funded. But as the 2008 economic recession took its toll on the economy, the plan’s investment portfolio had lost about a quarter of its total value, a major hit that recent bull market conditions haven’t yet recouped.

North Dakota public pensions aren’t alone in facing unfunded obligations and, though $1 billion is a lot of money, the issue of debt is relative. When taken as a whole, national unfunded liabilities for public pensions across the 50 states added up to about $1.75 trillion in the most recent fiscal year. Illinois holds nearly $130 billion on its own.

The proposed changes that the NDPERS board could bring before lawmakers in next year’s legislative session involve either increasing the contribution provided by employees and employers or decreasing benefits for new hires not yet enrolled in the system.

As the plan currently works, employees pay into the system with 7 percent of their monthly compensation. That contribution is matched to a slightly higher degree by their public employer, which pays 7.12 percent.

On the other end, employees generally receive full benefits by first meeting the “Rule of 85,” a number that combines age upon retirement with years of service in a plan-compliant workplace. NDPERS then uses a basic formula that applies a 2 percent multiplier against years of service and average ending salary to come up with a benefit level -- meaning that someone who worked for 40 years and earned a final salary of $100,000 would end up with an annual pension benefit of $80,000. That sum is then fixed with no cost of living adjustment.

The potential changes now being investigated by the NDPERS board include raising the contribution level sides by 1 percent, leaving both sides paying in about 8 percent each. For benefits, Schiermeister said the board is looking at a possible reduction of the multiplier to 1.75 percent -- a cut that could equal a roughly 12 percent decrease to the total benefit.

This wouldn’t be the first time the pension plan underwent legislative adjustments. Schiermeister said the Legislature has previously approved changes on the contribution side to help the pension planners maintain their current funded status of about 70 percent.

Managing the nest egg

Those revamped contributions make up part of the collective nest egg managed by the North Dakota Retirement and Investment Office. That office also oversees the portfolio for the Teachers Fund for Retirement, a major pension plan that provides benefits to the state’s public educators and is overseen by executive director David Hunter.

With nearly $2.4 billion in assets, the TFFR plan is almost as large as NDPERS. In terms of benefit payout, it might be larger -- TFFR provided about $195 million in benefits in the 2017 fiscal year, compared to approximately $180 million from NDPERS. However, though the teacher-specific plan is currently funded to a lesser degree at about 63.5 percent, Hunter said TFFR is likely to hit full funding without near-term legislative changes thanks to its higher levels of buy-in during the careers of future pensioners.

“When you look at the forecast … there’s been a lot of pension contribution reform that’s already taken place, so now we have a higher employee and employer contribution point,” he said. “At this point, there’s nothing that has to be done for the plan to be funded -- other than the contributions coming in and us meeting our investment return assumptions.”

Returns have historically been on-par or higher than those assumptions and, for the most part, employees in the teachers fund are contributing almost 11.75 percent toward their retirement. Employers chip in a point higher than that for a full contribution of more than 24 percent.

NDPERS isn’t yet looking to get to that level, which Dever said is the result of a full recovery plan enacted by legislative action to boost the teachers fund after its own recession-era hit. The NDPERS board is still weighing its own recovery plans in a process conducted with the legislative Employee Benefits Programs Committee that should yield more solid recommendations by this August.

For now, despite the long-range nature of their charge, Dever says the board is acting with the feeling that time is of the essence, especially given the nature of compounding interest.

“With the Legislature, it’s easier to kick the can down the road,” he said, “but in the last several years, if we had the contribution rate up there -- the stock market has done pretty well.”

Andrew Haffner

Andrew Haffner covers higher education and general assignment stories for the Grand Forks Herald. He attended the University of Wisconsin in Madison, where he studied journalism, political science and international studies. He previously worked at the Dickinson Press.

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