Guest Post: Give State Employees A Choice On Pensions

scottlouser

HB 1452 was originally introduced and ultimately amended with a Do Pass recommendation out of committee and received a similar Do Pass on the floor of the House late last week. The bill provides the option for newly hired state employees to direct the state as to into which retirement plan they would prefer to be enrolled.

The current North Dakota Public Employees Retirement System (PERS) Defined Benefit (DB) plan is shy of meeting its future obligations by approximately $850 million. HB 1452 is a step in the direction of correcting the broken model by offering newly hired employees the irrevocable election of entering into a Defined Contribution (DC) at or near the time of hire. Both plans have perceived and real benefits which are often debated. This post however is in reference to some confusion on the fiscal note prepared with the bill.

Readers may notice that the fiscal note was exactly the same for the next two biennia (to the dollar). This requires experts to make their best guess with reference to how many employees might make the election, when will it may occur, what are the anticipated rates of return for the fund, how long might those employees be employed, etc. In fact, it is near impossible to make those guesses. The bill does NOT require the perceived shortfall to be reimbursed by increased contributions; the fiscal note only references what it would take to keep the current pace under the same set of current assumptions.

Also, the fiscal note fails to reference the fact that employees opting into the DC plan necessarily remove themselves as a future liability of the DB plan upon retirement. Ironically enough, the very existence of the fiscal note highlights the fact that new and future hires’ contributions are paying for current and future retirees’ benefits. By electing a DC plan, the asset belongs solely to the employee (actually both the employee and employer sides of the contributions made in their name). Passage of this bill is a responsible step towards solving a massive future fiscal problem for our states’ taxpayers. It reduces future liabilities while giving both freedom and responsibility to those that so choose with regards to their own retirement plan.

Rep. Scott Louser

Rep. Scott Louser is from Minot and represents District 5 in the North Dakota legislature.

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  • dakotacyr

    We’ve all heard this story over and over again, give employees a choice. BS! A DC plan does not give any employee, whether in the public sector or private sector a secure retirement. That is why most employees in the public or private sector don’t want a DC plan. The only ones making money off the DC plans are the brokers and wall street. That’s why when this was offered to specific groups back in the late 90s, very few employees chose to move and then when the market tanked they asked to get back into the main system.

    Please do you homework on replacement values of a DC plan. All this will accomplish is that public and private workers will be working into their 70’s and 80’s with the state also picking up the cost of welfare benefits that these workers will be eligible for since they won’t have enough in their accounts to retire on.

    The facts are there. A legislator should not only take into consideration the risk for the taxpayers but also making sure their employees who worked diligently for your for their careers have a secure retirement.

    there is a way forward and it is not giving the employees a “false choice.”

    • Hal801

      You are in the stone age. Defined Benefit pension plans are a thing of the past, government will, once again, be the last to figure out that reality.

      Artificially low interest rates, induced by the 0bama government, are killing the performance of DB pension plans leaving the state taxpayers on the hook. Even if they are more secure (their solvency backed by the taxpayers), the taxpayer can no longer afford the risk.

      • dakotacyr

        You can name call all you want, Hal, the fact remains that DC plans will not give any citizen of this country a secure retirement. And it is important to note and is missed by many of the DC apologists on this blog, is that there are hundreds of thousands of public sector workers who will not get Social Security as there state is an opt out state such as Louisiana and many other.

        So let’s look at Louisiana. They just instituted a new plan for new hires getting rid of the DB plan. And now the replacement value is so low (30%) that even the actuary of the plan said that the state will create a new class of retirees who will be eligible for welfare when they retire.

        Now that’s really solving the problem!

        • Hal801

          Millions of people with a DC plan do, in fact, have secure retirements. Many of the DC plan retirees have better retirements than those on a DB plan. There are several city, county and state employees in this country who do not have secure DB plans because economic illiterates promised far more than their government could ever hope to pay. I would rather own the money funding my retirement than have an IOU from a financially inept government organization.

          • Dakotacyr

            Please provide any proof of what you are claiming, because it simply isn’t true. But I will be waiting for your proof.

          • Hal801

            From CNBC.com

            A central problem for cities nationwide is the cost of public-employee pensions and health benefits.

            In a 2011 study published in the Milken Institute Review, Joshua Rauh, a finance expert at Northwestern University in Chicago, found that state and local government’s have fallen short in their pension funding by somewhere in the neighborhood of $1.3 trillion (an estimate using official government accounting rules) and $3 trillion (using a stricter approach advocated by Mr. Rauh).

            If the unfunded liability is as large as estimated by Rauh, that would total some $20,000 per US household. For residents of large cities including New York, Chicago, and San Francisco, the per-household liability is even larger.

            If unaddressed, this situation could grow into a public-debt crisis.

            For now, though, most cities have some running room. Currently, only 30 of some 12,000 municipalities rated by Moody’s Investors Service have “junk” credit status, also known as below investment grade.

            The list of most-endangered cities includes places that were hit hard by the housing bust and recession : Detroit is the most prominent example, and Santa Ana, Calif., has a credit rating that’s only slightly above junk status in the Moody’s ranking.

          • Dakotacyr

            you claimed that millions of people have secure retirement with DC plans, where is proof of that statement. To quote Mr Rau, whom Keith Brainerd has more than responded to his “studies”mas an authority.

            The employees have always made their contributions where the governmental organizations have not, then try to blame the employees as if it is their fault.

          • Hal801

            I’m not going to get into the weeds with an economic illiterate. Any retiree could take money from a DC plan and purchase an annuity that would provide steady income just like a DB plan. I wouldn’t do that because there are far better options than annuities or DB plans, the rates of return are ridiculous. Consult your financial adviser if you aren’t prepared for life.

          • dakotacyr

            You’re not going to get into the weeds, because you can’t provide one whit of evidence for what you posted. The average amount in a person’s 401k, is 75,000, can’t hardly live off an annuity with that.

            Oh, I’m more than prepared, I have a pension, a 401k and will have my social security. Even if I don’t have SS, will still have a secure retirement. But I make a decent salary, work for a terrific employer that pays a good wage, terrific benefits and furnish us with financial planners.

            And Hal, you have to have money in a 401k for a financial planner to do anything.

          • Hal801

            I have run the numbers many times backdating data over different time-frames. The only way DB’s beat DC’s that are adequately invested are when the taxpayer provides a backstop when the market underperformed. Since you have both a DB and a DC look at your retirement projection for each. Which one will give you the highest rate of return?

        • yy4u2

          Your thinking is flawed. How secure do you want to be in retirement and for that matter, when do you want to retire? Should you sheepishly rely on SS (at 43 I’m not counting on it) or company retirement plan (hope it’s there but have sacrificed what most people have today for a better tomorrow and have numerous savings plans)? Creating wealth takes time and money. Stealing wealth (from the tax payers) takes a swipe of a pen. Being an adult doesn’t mean running to Daddy Govt for answers and nothing but death and taxes is guaranteed.

          • dakotacyr

            The worker worked for that pension.

    • tony_o2

      Of course people prefer a DB plan. They are “guaranteed” a specific payout when they retire. The problem is that the plans don’t produce the promised rates of return on investment, and then the shortfalls are expected to be covered by the taxpayers.

      This means that the government has to take money from the taxpayers to pay the retirement of these people. The money that they take from the taxpayers can no longer be used by the taxpayers to invest in their own personal retirement accounts.

      • dakotacyr

        The fact is most state DB retirement plans are on the mend. In those states where there are big issues, is the result of the economy and the fact that those legislatures did not make their required contributions. The employees made their contributions but the legislatures did not.

        • sbark

          hmmm…..”most of the DB plans are on the mend”…..but not N.Dak, its burden on the taxpayors, according to Morningstar analysis, went from 190.00/ citizen in 2008 to 2011 level of 1060 plus or minus………and yet a well managed state like Wisc. went the other way by 200%…….
          appears there is a root problem in the “process” of N/Dak system…..

  • Captjohn

    Under the defined benefit plan the taxpayers get to make up for the short comings of the managers of the fund. Witness the growth of red ink in defined benefit plans. The taxpayers become the ultimate guarantor of a retirement package.
    The real fear of the union minded is that new hires will continue to choose the portability and self direction of the direct contribution plan. They perceive that as a threat to their own retirement plan.
    As I have stated earlier North Dakota could make the present plan for those all ready enrolled actuarialy sound and then walk away from it. They then would be on the same footing as all of us. Their problem would become who was investing their group funds.

    • Hal801

      Captjohn,

      You make a very good point. The portability of a defined contribution plan is very valuable in our time where the average person holds about 10 different jobs throughout their career. That portability allows a worker to take higher paying employment without having to consider the loss of the DB.

      • Dakotacyr

        first of all you cherry pick the number from a very limited study that didn’t look at the entire workforce. Secondly, the NDPERS pension plan is a portable plan, after three years, they can take their money with them to the next job.

        • Hal801

          The number of jobs per career has so many regional variables it isn’t worth arguing which national average is correct, it’s between 6-12. My point is that taxpayers can no longer afford to backup DB pensions. The federally operated PBGC is massively under water and many state plans are hopelessly underfunded with some headed for certain insolvency. The trend had been toward defined contribution retirement plans, like it or not, that trend will continue.

    • sbark

      Agree, ……….its all about mngt ……or lack of it.
      clear case is Wisc, where they actually had, according to Morningstar Ratings, a very well mngd Public Pension plan even before Gov Walker made his reforms in 2011 to strengthen it even further—and insulate the taxpayors.

      Wisc is 99.% funded, with only 23.00 in liabilities per taxpayor……….contrast that with N.Dak at 71.7% funded, and a 1061.00 in liabilities per taxpayor …….which was only 190.00 per taxpayor in 2008——a 500% increase
      …….and then contrast that again with the performance of Wisc which was 51.00 per taxpayor in 2008……..a decrease of 200%. So it cannot just be blamed on the 2008 Fannie Mae crisis alone.
      Did the N.Dak pension mngt group operate outside of guidelines, were the guidelines not stringent enough, is there a story inside the big story untold?

    • rolf

      I value the insights offered by Captjohn and appreciate his past service to ND. However, I have to comment on the last section of his post because this is a common misconception about the DB problem.

      We cannot simply fix the problem with a 1-time injection of money and walk away. Unfortunately, it is not that simple for the taxpayers. The state could put $800 million into the plan to make the plan “actuarialy sound” today. But, it would not guarantee soundness into the future. That cash infusion would need to be invested and the long-term “actuarial soundness” of the plan would require an 8% return every year on all plan investments.

      You also have to look at the financial markets. Any funds contributed to these plans must be invested. But what are the prospects for stock and bond investments? The stock market has had a pretty good run the last year but with all of the economic headwinds we face, how will money put in the stock market to fair over the coming years. The bond market is more worrisome. Bond investments today pay a very low interest rate. But at some point in the future interest rates will rise, at least getting closer to the long-term average. When that happens the bonds you buy today will lose significant value.

      I am not in favor of a large infusion of cash today to address this problem. I prefer preparing for the future and making sure the state has the resources available to meet its obligations as they come due in 30 to 40 years.

      Rep. Louser is correct. Providing the option of a DC plan is at least a step in the right direction if only because those employees opting into the DC plan will not be adding to DB problem.

      Addressing the current unfunded liabilities in the state’s DB plans will be a painful and long-term issue for North Dakota. There is no question that the DB plan is unsustainable, the biggest question is, how deep will the hole be before we stop digging.

  • Roy_Bean

    Defined benefit plans invite fraud on the part of management. They hire workers with the promise of delayed payment for work today, then they don’t fund the delayed payment. By doing this they can show great profits and demand big bonuses in the short term and move on before the reality sets in later. General Motors is a great example right now. They sold cars for years without figuring in the cost of what they promised their workers in delayed payments and now they have about a $2000/car obligation to workers who built cars 30 years ago. A defined contribution incurs expense in real time.

  • Captjohn

    Clarification on my statement. When I say make it actuarialy sound and walk away I mean no more taxpayers money to keep it sound. Continue to Make the contribution required for those still in the plan but no more. How many would stay in it if the managers don’t perform? It then becomes an employees choice and a self fixing problem for the states taxpayers. To much to ask?
    I have a manager of my own retirement plan and although I would always like better performance I am satisfied. What ires me is the Feds wanting to take another bite out of my retirement.

    • rolf

      Certainly not too much to ask given what is at stake. However, there is a great misunderstanding when it comes to DB plans. Even if the state (actually the taxpayer) put $1 billion into the plan it could not guarantee that future taxpayer dollars would be required in the future.

      Any “shore up” contribution made to the plan will have to average 8% each and every year to pay for the promises already made. My point in addressing this issue is the common misconception, I have seen it repeatedly stated on this blog – that the State should simply take surplus money and make the plan whole. That is wrong. Whether any contribution makes the plan whole today does not guarantee the plan will be whole in 20 years. The wholeness of the fund is based on the actuaries assumptions and those assumptions include an 8% return on average. If the investment returns do not meet that assumption even more taxpayer money will be required.

      The PERS plan has paid out more in benefits than it has taken in contributions every since 2001. It has tipped. They are already attempting a sort of self fixing by requiring each current participant to pay in far more than the actuaries say is required for that individual. Like Social Security the contributions from the younger workers are being used to pay the current retirees, but even that is not enough.

      A voluntary solution is a first step but even this fails to address the core problem. Portability is attractive to younger people but even more attractive is a retirement benefit that does depend in the least on investment performance because it is secured by the taxpayer of ND.

      I am certainly not trying to pick a fight on this one issue and we agree that this has to be addressed. My point is that until there is a broad understanding on the part of the taxpayers and the younger workers we will not be able to take the important first step. And that is to stop digging the hole.

  • RCND

    Defined benefit plans are a legalized Ponzi scheme just like Social Security is. The legislature should have forced new hires onto defined contribution rather than given them the option. All they have done this session is delay the inevitable for another two years

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