It grates on some when I bring up legislative activity from before the turn of the last century, but in the case of public pensions there is a lesson to be learned. When I served in the legislature we tried to change the retirement plans for public employees from a defined benefit plan to a defined contribution plan.
Instead of getting that accomplished we usually went backward.
The North Dakota Public Employees Association was usually the victor in these skirmishes for a number of political reasons. The voters need to know the legislature will, and has had in the past, bills introduced that actually will make the retirement pension funds for teachers and other public workers even more financially unstable from an actuarial standpoint. I can remember the arguments for lowering the retirement age or enhancing the benefits so as to attract more people to government service. Usually that took the form, as an example, of changing the rule of 75 to 70. Today a person approaching retirement takes the total of the years of service and adds it to their age to see if they qualify for the pension benefit. Thus in the rule of 70 for example a person who first became a state employee at age 25 and continuously worked until they were 60 could qualify for full retirement.
Another issue was how many years of service were used to calculate the benefit. Would the state use the compensation paid for the last three years of service or the last five to calculate the benefit? I know district judges who would wait until the legislature had passed the funding for the ND Unified Court System before making their retirement plans. If they knew they would get a substantial salary increase they would hang on another two years so the average of their pay would boost their pension.
Granted, we all would make the same calculation if it were available to us.
In the above two cases the NDPERS actuaries always said the impact was minimal. Of course what did we expect they were contracted by PERS?
The other factor outside the control of the legislature is the monetary performance of the fund. As pointed out in SAB some days ago the actuaries are using the unrealistic number of 8% average yearly growth for the investments of the fund. Who after these last four years and looking ahead with the present White House administration thinks that is even close? The Federal Reserve has already said they intend to keep interest rates at record low levels for the foreseeable future which has a direct impact on all retirement plans.
The question then remains how many hundreds of millions in taxpayer dollars is reasonable to contribute to a fund that has no chance of becoming fiscally sound for a long time to come? Will North Dakota become a Stockton or San Bernadino, California? How about Detroit, Michigan where retired city employees feed on the decaying corpse of a once great city because of a very liberal defined benefit plan?
North Dakota should do a conversion to a defined contribution plan just as most of corporate and private industry has. I can tell you that in Florida there are many retired United Air Lines pilots or former General Motors white collar workers working as Wal-Mart greeters or at a golf course cutting grass and carrying golf bags trying to make ends meet when their defined benefit plans hit the skids. They all will tell you they wish their employers would have changed to a defined contribution years ago. Will it happen to NDPERS retirees? The pilots and some city employees didn’t think so 30 years ago.
An idea we tried some years back was to promise to make the defnied benefits plans sound over a few bienniums if we changed NDPERS to a defined contribution plan for all new hires. As an added incentive we were going to allow present employees to make the conversion if they wished. I think that was the deal breaker because all of the old employees were worried that many of the newer hires would make the conversion thus making their defined contribution plan even more unsound.
The politics went like this: The Republican legislators who lived in districts where there were a high concentration of public employees were afraid to vote against NDPEA even though it didn’t represent the majority of state employees. Of course the Democrats were lock step with NDPEA as it contributes heavily to their campaigns. The Republican elected officials in the capitol were silent or openly against the plan. They either felt they had a vested interest in preserving the status quo or didn’t want to take the heat which would have been inevitable.
NDPEA and NDEA have the state and school districts in a catch 22. Present policy makes the problem worse and the politics of fixing it even harder. As more state and local governments find they are unable to sustain defined benefit plans it becomes obvious that Rep. Bette Grande’s proposal last session, to move new state hires to defined contribution plans, had merit.
The state has the money to fix it now and the legislature should do so.