According to an audit report just posted on the State Auditor’s website, covering the 2012 fiscal year which ended in June of 2012, the Public Employees Retirement System is only 65% funded, down more than 5% from 2011 due to investment losses.
According to the audit report (see below) created by Brady Martz & Associates, “The funding ratios for the Public Employees, Highway Patrol and Job Service retirement systems decreased from the previous fiscal year as a result of the recognition of previous years’ investment losses.”
According to the same report, all pension funds managed by NDPERS lost a combined $17.268 million with PERS specifically losing over $24 million.
Back in August, State Budget Solutions issued a report calculating that North Dakota’s unfunded pension obligation was over $4 billion, though state officials disputed that number. “The $4 billion isn’t even close,” OMB director Pam Sharp told the Minot Daily News. But SBS isn’t the only group to have pinned North Dakota’s pension problem in the billions. In 2010 Grand Forks Herald opinion editor Tom Dennis noted a report from the Journal of Economic Perspectives which put the state’s shortfall at “nearly $4 billion.” That was a number based on 2009 calculations.
Clearly, the shortfall has been getting worse. But why don’t the state’s numbers show it? Because the state, like most other local governemnts, is assuming an 8% rate of return on pension investments (an assumption Warren Buffett called “crazy” in 2011).
As you can see from the Brady Martz report, they are required to assume that 8% rate of return:
Groups like SBS use a much more reasonable 4% rate of return assumption, but given the fact that these funds are losing money through investments, they aren’t even hitting that 4% growth fund (which is why the funding ratio is getting worse).
In Dalrymple’s budget address this week he called for an increase in contributions to these pension funds, and the legislature will almost certainly do something along those lines, so that will change this calculus somewhat for the better (at the expense of the taxpayers) but that’s a band-aid, not a fix.
The fundamental problem in all of this, though, is not investments so much as problems inherent to defined-benefit pension plans. These are ponzi schemes which only survive as long you keep adding a growing base of workers at the bottom to keep funding benefits paid out to the workers at the top. Long term they cannot survive.
The state has a defined-contribution pension plan available, but so far no workers participate in it, which isn’t surprising. Who wouldn’t take what looks like a sure-thing on paper over something that is merely a defined contribution?
But the state needs to change this. The taxpayers shouldn’t be on the hook for billions in unfunded liabilities. Defined-contribution plans, which is what most in the private sector enjoy, should be mandatory. Employees current in the defined-benefit system should be made whole, with the state keeping up the compensation promises made to them, but at the very least new hires by the state should be put into a defined-contribution plan.
Update: According to this audit report, the TFFR (Teacher’s Fund For Retirement) is even worse off, with only 60.9% of future obligations funded, a serious decline over the last several years.
And, again, this is based on the assumption of an 8% rate of return from investments. The liability is a lot worse when you consider that hitting such a rate of return is unlikely.