Another Lost Year in Pensionland

Tax cuts aren’t the biggest threat to the state’s long term fiscal well-being

What is the most interesting committee to watch at the state capitol?     For my money it’s the Legislative Commission on Pensions and Retirement.   The topic is deathly, the technical details stupefying, but nowhere else in government is the subordination of the public interest to private interests, political pressure, and fiscal convenience so visible and unvarnished.   It’s both important and fascinating to witness.

If you want a seat, get there early because it’s always standing room only an hour before the show begins.    Over here are the uniformed public safety officers whose piercing, stoic stares make you feel like you’re going 55 in a 40 zone just sitting in a hearing room chair.   Over there are retired teachers.   Although many of them have been out of the classroom for a decade or more, they are still more than able to give “the look” that makes you immediately sit up straight and swallow your gum.    Commission members know they are being watched  --  very, very closely.

To the testimony table come the representatives of each of the three major pension stakeholder groups -- government employers, active employees, and retirees --  all grudgingly committed to yet another round of “shared sacrifice” in order to repair these plans.  The specific details of the testimony may vary but everyone’s talking points can essentially be summarized as follows:

  • Affirm unending affection and support for the existing defined benefit system structure
  • Explain why your proposed share of the next round of shared sacrifice is too great
  • Get more money from the state to address bullets 1 and 2

There are, however, some important people missing from the shared sacrifice testimony list because they are unable to attend.    They include the 4th grader from the future who can’t  get the extra help he needs in a class size of 35 especially since the district had to cut funding for educational assistants; the government employees from the future whose wages have stagnated because more and more compensation resources had to be redirected to pension support;  senior citizens and low income households from the future who have watched welfare services atrophy over several years under belt tightening; and the homeowner from the future who is paying astonishingly more in property taxes and fees to support higher government spending but at the same time seeing  a lot less public investment.    In other words, they are the millions of future Minnesotans sacrificing their well-being as the expectations and demands of the present cause the needs of the future to be thrown under the bus             

There was a lot of emphasis about making sure this year’s tax bill did not endanger the state’s fiscal health or jeopardize the state’s long term welfare.  There is very good reason to be cautious, partly because of the policy uncertainty and political chaos taking place in Washington, DC but also because the state tax system is now more volatile thanks to emphasizing and prioritizing revenue progressivity over revenue stability.   

But with all the attention this year on revenue adequacy, it’s become too easy to forget about spending tails which are no less of a threat.   And in public pensions, we have the granddaddy of spending tails -- billions and billions of dollars in already existing unfunded obligations being foisted onto future taxpayers with new obligations being created every year.   The implications are already being felt.   School districts were adamant this year that their operating budgets absolutely could not absorb the cost of any contribution increases.  According to TRA, $237 million in new state aid is needed to cover these costs over the next four years – which would only keep the plan’s current 70% funded condition (at a 7.5% return assumption) from getting any worse.   The question which should be on everyone’s mind is, what will the “ask” on the general fund grow to be to continue to hold school districts harmless in year 5?  In year 10?

With a $1.65 billion surplus there was an opportunity to make some significant progress on this issue.   Appropriate some meaningful cash into the funds but handcuff that action to substantive reforms on the benefits side that would stop the export of current obligations onto future taxpayers.    LCPR staff even put together an interesting portfolio of new reform avenues to consider.   But money could not be found – undoubtedly a casualty of biennial spending and tax relief priorities.   Meanwhile, stakeholders’ testimony expressing hostility to even the modest tweaks of cost of living adjustments on the benefits side made it abundantly clear we are a long ways off from being able to implement anything resembling a true solution to the problem.

A retirement expert recently called the pension issue “the financial equivalent of climate change,” saying “we must address it now or accept that its adverse consequences will haunt future generations, putting an impossible strain on our children and grandchildren.”    “Pension change denial” is alive and well in Minnesota and we wonder what it will take to snap us out of our manifest indifference.