Guest Post: North Dakota’s Pension Timebomb

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During the last few months, as has been a tradition for the last six years or so, state officials have been very proud to brag about all the revenue coming into the state’s treasury because of the oil boom.

Last week Governor Dalrymple released his budget proposal for the next two years.   While there is certainly plenty of money, and and even more ways to spend that money, it is important to put these surpluses in perspective of impending costs in future years that could very easily derail the long term health of the state budget.

While most people understand the threat that the Federal Government poses to North Dakota’s economy when it comes to taxes and regulation, there are major areas in North Dakota’s internal policies that could pose major problems down the line – and to this point, the state legislature and governor have ignored these issues.

During the 2011 Regular Legislative Session, a strong effort was led by state representative Bette Grande (R-Fargo) to reform and modernize North Dakota’s public pension system.

With a 69 to 25 Republican Majority, the effort to reform both the Teacher’s Retirement system and the Public Employee’s Retirement system away from a Defined Benefit program to a 401(k)-style Defined Contribution program failed to pass the North Dakota House of Representatives. 

In the last two years, the public pension funds have continued their downward slide that began in 2008, and now represent a $2 billion dollar unfunded liability over the next ~30 years.

As the chart above shows, the Public Employee Pension Fund is now funded at a 65.1% level and is currently $873.9 million short of being able to cover projected retiree benefits over the next ~30 years.

As the chart below shows, the Teacher’s Retirement Fund is funded at a rate of 60.9%, and is over $1 billion short of being able to meet its projected obligations over the next ~30 years.

These are alarming figures, especially in light of how North Dakota’s leaders spend most of their time bragging about all the surplus dollars the state budget is seeing come in because of the oil boom.  However, this crisis is not a surprise to anyone.

Even more staggering is that from 2010 to 2012 these pension funds have seen their unfunded liabilities increase from $1.3 billion to $2 billion.

These pension funds are in trouble for two reasons:

1. They are based on the antiquated Defined Benefit approach to retirement. This means that the state and local governments have made promises to employees to provide fixed benefits no matter what the market does.  The state is obligated to make these benefit payments regardless of how much revenue is earmarked for that purpose or what the market returns are.

2. The investment philosophy of these pension funds is to chase an 8% annual return.  Even high-flying (liberal) investment geniuses like Warren Buffet say that goal is out of line and that a 6% return is more realistic.

The time to fix these problems is now, while North Dakota has the money to rebalance its tax code, and get future liabilities under control.

Continuing to ignore these problems, and hope they go away, is The Washington Way not The North Dakota Way.

Dustin Gawrylow is the managing director of the North Dakota Watchdog Network.

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