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By Rep. Bob Vogel
I was not surprised to find out as I studied the solvency of state pensions that it is one of those challenging subjects which has been easier to put off for another time, instead of doing the heavy lifting by seeking solutions today.
That approach is one reason our state – like many others – finds itself on uncertain ground in terms of honoring contractual commitments it has made to state employees. As a member of Minnesota’s bipartisan Legislative Commission on Pensions and Retirement, I recently attended a seminar where this topic was analyzed at great length.
One of the more interesting discussions involved the view of the rating agencies who are responsible for critiquing states’ fiscal standing, much like the credit bureaus who establish our consumer credit scores. Minnesota traditionally has earned a strong rating, but more rigorous scrutiny of state pensions is likely to play a larger factor in future ratings. This means financial projection method improvements will be necessary if we are going to retain a strong rating.
A significant challenge I see will be to balance the political nature of pension reform with the fiscal reality that faces us. For years, more lenient, optimistic assumptions used in government accounting have not been as transparent as the private sector. For example, government is not forced to declare accrued liabilities (dollars owed, but not yet paid), the same as businesses in disclosing their financials. Furthermore, there seems to be no realistic standard for rates of investment return used in forecast calculations, meaning one state’s projections may be more optimistic than another’s.
From what I can determine, if Minnesota had to pay out its commitments today from the funds it has in reserves today, the shortfall could easily be $50-$80 billion. As a comparison to grasp that figure, the budget assumes a bonding bill of about $650 million per year. That means, if the above assumption is correct, making up the pension shortfall would consume the equivalent of 60-plus years of what the state is now borrowing for capital needs.
The significance of needing to solve the issue, and knowing there is no single solution to putting our state on solvent pension footing, begs the question of what can be done. Toward that end, I have been studying what other states have found helpful so that I can bring some ideas back to the commission table for discussion.
Of note from my research is stress testing, which applies a number of scenarios relating to pension liabilities, therefore giving decision makers a better idea of where things are now. Having that information then allows for better ways to confront planning for the future.
With all of this, it’s important to remember government accounting methods cloud the issue, making it difficult to know exactly how much is needed, so the above are just estimates. What does seem certain the amount of deficiency is large, and probably getting worse.
The bottom line is the state has made contractual commitments and it’s necessary to find ways to address them with a fair, sound, and lasting plan. Procrastination is no longer an option, decisions will be difficult, and most importantly we need to look to the future.