Although the Legislative Commission on Pensions and Retirement will not hold their first meeting for 2017 for a couple of weeks, a recent hearing in the House Government Operations Committee provided a sense of “coming attractions” – a look at what will likely be key features of the 2017 omnibus pension bill. Leadership of the State Board of Investment and the three major state plans – MSRS, TRA, and PERA – introduced their organizations and their work to committee members. Pension plan directors also testified on the current conditions of their plans while offering a preview of the next round of repair proposals.
First, some context. It’s worth putting this indigestible, boring, “even-minimal-media-coverage-is-believed-to-cause-cancer-in-laboratory-rats” topic into some current topical and budgetary perspective:
|The (much discussed) 2017 MNDOT Highway Capital Investment Plan||State and Local Public Pensions|
|Funding Shortfall||$18 billion||$20 billion|
|Nature of Funding Gap||Evolving over the next 20 years||As of July 1, 2016|
|Key rate of interest influencing growth rate of funding gap||Around 5.0%||8.0% and higher|
Despite this, from the testimony provided it’s clear -- to the extent remedial action is planned at all -- proposed repairs will be the usual recipe of lowered cost of living adjustments, yet another fresh 30-year amortization period to pay off these obligations for the current workforce (“Mom and Dad, we’re happy to pay your bills. Put it on our tab!”), and phased in employee and employer contributions. It’s essentially the same type of repair package passed in 2010 in the aftermath of the Great Recession– when the market just coming off 20-year lows rather than sitting at all time highs, and the funding shortfall was actually $1 billion less than it is today.
There’s something striking about watching government stakeholder testimony on this issue. You begin to appreciate that lawmakers’ hesitancy to tackle this issue with greater vigor is not just political timidity resulting from interest group pressures and near-term biennial budget wishes trumping long-range concerns. It’s also a function of the messaging provided by government experts. The language and messages key government players convey to legislators seem carefully constructed to reinforce conventional thought, redirect and deflect attention away potentially dangerous lines of questioning, and wallpaper over logical errors and inconsistencies. It’s a bit reminiscent of “Newspeak” – the manufactured language in George Orwell’s dystopian novel 1984 designed to suppress any ideas and concepts dangerous to the regime.
Here are some examples of Orwellian “Newspeak” vocabulary we saw in action at the recent hearing:
“Bellyfeel” (noun) – a blind enthusiastic acceptance of an idea
According to information presented by PERA, its General Plan, which covers most local government employees who are neither teachers nor public safety employees, is short $6 billion in assets for the obligations current employees have already earned reflecting a funded ratio of 72%. It is a mature plan with benefit payments exceeding contributions by 75%. Under current projections, “full funding “doesn’t arrive until 2062 – which is also conditioned on realizing 8% annual returns all along the way. Yet PERA officials argued that no additional corrective action is warranted at this time. That is some remarkable sustainability bellyfeel.
“Crimestop” (verb) –preventing an ability to perceive logical errors in order to repel any train of thought leading to a heretical direction
The “Dollar Bill of Shared Responsibility” made its usual appearance communicating the idea that investment returns “provide most pension funding” and by implication contributions from employees and employers are actually only modest financial players in the grand scheme of pension finance. Or in the words offered in public testimony, investment earnings “lessens the load on taxpayers.”
Of course, the capital to invest to obtain those earnings has to come from somewhere – namely previous employee and employer contributions. And more importantly, if inanimate entities like investment earnings somehow become “irresponsible” and fail to deliver their share of the lifting, the money still has to come from somewhere. In the ten years we have followed public pensions, the powerful “Dollar Bill of Shared Responsibility” has crimestopped legislators from ever asking the one question that absolutely demands to be to be asked: what assurances do we have that if investments fall short, our private equity and other outside investment managers will be willing to make up the difference?
“Blackwhite” (noun) – a willingness to say something in contradiction of plain facts when party discipline demands it
The State Board of Investment is careful (as well as correct and justified) in creating a political firewall between their responsibilities as asset managers and the responsibilities of the pension plan boards whom they serve. But rhetorical support can still be thrown in the direction of those working to keep the conventional messaging intact.
In its presentation of the makeup of the pension plans’ asset portfolios and accompanying investment risk, SBI made the vitally important point that projected future returns are based on probability. They have determined the median 5-year return probability for their current asset allocation is 7.3%. Problematically, this is less than both the 8.0% return assumption currently employed and the 7.5% assumption being considered. Nevertheless, on its slide highlighting the range of returns, SBI also noted a 47% chance of meeting or exceeding an 8% return over the next 5 years with an editorial bullet, “a probability of 47% is still a high probability.” Of course, 47% is by definition is less than a coin flip and less than the higher probability (53%) that such a return will not be attained.
“Doublethink” (noun) – the ability to hold two contradictory thoughts at the same time remaining untroubled by the contradiction
Plan officials embrace the thought of pursuing greater returns premised on investing in riskier asset classes to lower contribution requirements. At the same time they embrace the thought of contribution policies that reflect steady, easy-to-estimate costs from year to year – even at the expense of meeting plans’ annually required contributions. The problem is, you can’t have it both ways. If you want to embrace the volatility riskier assets classes offer, you had better be prepared to fully embrace the contribution volatility such a strategy demands. The result of this doublethink is the situation we face today.
What does pension discussion befitting 2017 rather than 1984 look like? Consider these quotes coming from pension officials from Oregon – a state facing funded ratios and unfunded liability amounts nearly identical to Minnesota:
It's a systemic problem. Everything is predicated on a linear 7.5 percent investment return, and that has not been sustainable. It's a whole different paradigm to what we've been used to in the past.
John Thomas, Board Chair, Oregon Public Employees Retirement System
We should have been addressing this 20 years ago and it’s just been building. It’s a little bit like a Ponzi scheme. Sooner or later it’s going to catch up with you. Can’t we rip the band-aid off and deal with reality? We keep stacking more and more on because we’re unwilling to deal with reality.
Katy Durant, outgoing chair of the Oregon Investment Council
My call to the Legislature and to the governor is for leadership on this, and I mean right now. This is becoming a moral issue. We can’t just talk about numbers anymore.
Rukaiyah Adams, Vice Chair, Oregon Investment Council
When Minnesota committee hearing tapes start recording statements like these, we’ll be on the right track.