OUR OPINION: Pension fund Job 1: Avoid another shortfall
In Maine, the situation is clear: "Unless this problem is fixed, we are going to have a problem getting resources for kids in schools, welfare recipients, roads, bridges, highways, the court system and on and on," a spokesman for the new governor...
In Maine, the situation is clear: "Unless this problem is fixed, we are going to have a problem getting resources for kids in schools, welfare recipients, roads, bridges, highways, the court system and on and on," a spokesman for the new governor said.
In Chicago, it's moving from serious to dire: "It's a legal issue about whether you can push the city into bankruptcy to pay for these benefits," the president of the local Civic Federation told the Chicago Tribune.
In Arizona, it sparked an investigation by the Arizona Republic. "Even as local governments and the state are slashing budgets, Arizonans are propping up public-pension systems that allow civil servants to retire in their 50s, receive annuities that can exceed $100,000 a year, and collect pensions while staying on the same job," the series began.
Those are the stakes as North Dakota lawmakers figure out how to fill the state pension funds' billion-dollar shortfall. Where does the state stand?
Let's start with the good news. North Dakota's reputation for frugal government extends to its pensions. For example, the Public Employees Retirement System offers only meager retirement health benefits. Also, the PERS plan does not make cost-of-living adjustments to its pensions. And while other states give many retirees 3 percent of salary for every year worked, the PERS plan's number is closer to 2 percent.
But despite these restrictions, North Dakota still faces huge gaps between what it has promised government workers in retirement and what it has budgeted and saved. That's the problem the 2011 Legislature must solve.
A legislative committee recently endorsed one proposal: Boost pension-fund contributions from government workers as well as the agencies, school boards and so on that they work for.
But here are two issues. The first centers on the pension itself. While North Dakota's pensions are less generous than those in many states, they're more generous and secure than the 401(k)s now standard in the private sector.
Good pensions -- along with better job security -- used to offset government workers' lower salaries. But in recent years, government wages have grown.
Is it fair to taxpayers that many public sector jobs now come with near-equivalent wages as well as better job security and pensions than are available privately? Or should better-paid government workers be expected to assume more retirement risk, as most workers in the private sector do?
The second issue centers on that phrase "retirement risk." In North Dakota, the pension funds' budget gaps grew because of the market crash. The funds counted on earning an annual return of 8 percent, and that worked -- until it didn't: The crash blew giant holes in the fund balances. The trouble is that the proposed solution -- higher contributions from employees and their employers -- still counts on those 8 percent returns.
That's too high. Getting such returns demands risky investments, and that strategy leaves the funds vulnerable to market downturns. What happens when the next crash comes?
What happens is that taxpayers once again will be on the hook. The state must pay its pension obligations whether the funds earn 8 percent or not -- and as North Dakota and other states can testify, the key word there is "not."
In Utah, a new pension plan caps the government's pension contribution at 10 percent of the workers' salary. If the fund does poorly, the employees have to make up the difference (or accept smaller pensions). But if the fund does well, each employee gets to invest the surplus in a personal 401(k).
Thus, the workers share in the upside, but they -- rather than taxpayers -- assume the downside risk.
The point is not that North Dakota should adopt Utah's plan. The point is that North Dakota lawmakers must study this issue and weigh fixes with care, lest a "pension tsunami" washes surpluses away.