This story pricked up my ears yesterday. It was reported that several of Minnesota’s public employee retirement funds were underfunded by almost 10 billion dollars.
I’m always nervous when benefits are mandated by law as they are in Social Security and Medicare, without regard to future availability of funds to pay for them.
When I was elected to the Duluth School Board I made it a point to ask the Director of the Duluth Teachers Retirement fund about how it guaranteed its member’s pensions. As a fellow who sold annuities briefly in the private sector (I was a lousy salesman) I was aware that there are a few fairly simple methods of disbursing money to people from the lump sums that they have built up during their work years by the time of retirement.
Retirees can take a fixed amount of money for a specific time, say twenty years. This monthly amount paid out will not change whether inflation does or not. The payments are calculated in advance to last until the fund peters out and they are guaranteed. Because the payments are time limited they can be larger.
Retirees who do not want to gamble on the length of their life can set up an annuity which will last until the end of their life. Of course, the retirement fund managing such a pension has to presume a long life for people choosing this payment option. (I recall the story from a few years ago about the death of a French woman who fifty years before had agreed to sell her house to another buyer for a fixed price. She would be allowed to continue living in her home, however, until her death. Unfortunately for the buyers the woman lived to be 112 years old. She outlived them and they were never able to take possessioin of the house that they had paid for. Pension Funds can’t allow themselves to get caught short that way) Pension funds granted for the remainder of a recipient’s life are considerably smaller than time limited annuities.
The problem I’ve seen with the T (teachers) RA, PE (public employees) RA, and the Duluth, Minneapolis, and St. Paul Teacher RA’s (retirement funds) is that they often pay their recipeints more when their stock earnings are good but do not reduce payment levels when their earnings diminish leaving a shortfall with regard to their future obligations. The results for over-generous funds can be disasterous. The Duluth and St. Paul Teachers Retirement Funds have both strongly resisted being combined by the State legislature with the Minneapolis teacher’s fund for just this reason.
The state is not required to shore up profligate and overgenerous retirement funds. Nonetheless, it might be strongly tempted to shore up a weak fund with state taxes in order to tempt resistant retirement funds to merge with and thus bolster the mismanaged funds with their own better managed assets.Â
I was so shocked by the implication in the second to the last paragraph of the story that I called its author and asked him if he could confirm what I thought it said:
“The Public Employees Retirement Association fund agreed to raise contributions by cities, counties and workers to reduce its deficit. The government contributions are expected to cost $380 million over the next five years. Increased contributions are also under consideration for the pension plan for state workers.“
This makes it sound like the PERA can force municipalities to give them more money to make up for their poor investment decisions. What? Funds can be demanded without resorting to contract negotiations! This is much like the bind that the City of Duluth is in with regard to the post retirement benefits of its workers.
Duluth may have the option of declaring bankruptcy if it can’t cope any other way. Could PERA put other municipalities in the same position? Would bankruptcy be available to the state of Minnesota in a worst case scenario? Full faith and credit to the person answering these questions.
