Column: Al Arends, My Point of View

We have all heard about cover-ups — yes, and I’m not talking about clothes. Coverups have brought the resignation and investigations of the presidents. The downfall of the Nixon presidency was a great coverup. Bill Clinton’s escapades were attempted coverups and helped get him impeached. There are many more coverups and some of them are still going on. I believe the biggest coverup in Minnesota is the public employee’s retirement plan.

Currently, the unfunded liability of the combined public employee pension plans is $19.4 billion. This is a collectable debt owed to the teachers, city, county and state employees that the Minnesota taxpayer is going to have to pay. There are some variables that could make this debt larger or even smaller. However, a pension consultant hired by the state Legislature last year said that the way the plan is currently funded it is unsustainable and if things do not change it will be a huge tax increase for the Minnesota taxpayer.

So, what are the reasons that create this problem? First, the state has about $49 billion in the combined pension funds, and they are projecting these funds to grow at 8 1/2 percent per year. Actuaries have always said to keep projections at 4 to 6 percent. Each year you miss the projected return, you increase the debt of the pension plans. Of course, if the investments were to return more than 8 1/2 percent it would help lower the debt. Out of 152 public employee pension plans in this country, only 12 use 8 1/2 percent assumption. If the interest assumption is lowered to a more realistic return, it will increase the unfunded liability dramatically. A plan to lower the interest rate by a percentage point each 5-year period for 25 years would gradually correct this situation.

The pension consultant also said that the investment committee managing the investments was taking very high risks with the funds. This works when the stock market has good returns, but becomes a disaster during poor economic times. Their investment policy resulted in high returns during the ’90s and the legislature made an unwise decision by increasing pension benefits by 11 to 14 percent during that time. It ended up paying out surplus funds to retirees, but resulted in increasing the unfunded liability. I am sure the retirees appreciated it and they, of course, voted for the politicians who made that disastrous mistake. Our children and grandchildren will have to pay for that mistake for years in increased taxes.

The other condition that increases costs of a pension plan is early retirement before 65. Many people in the private sector cannot afford to retire until 65, but in the public sector, it is not unusual to see employees retire as early as 55 or sooner with full retirement benefits. In a December article in USA Today, it stated that an employee retiring at 55 requires nearly twice as much in his retirement account than a person retiring at 65. This was not as severe a problem 20 or 30 years ago, but longevity has increased dramatically since then and this also increases the amount necessary in the retirement fund. According to USA Today, the problem of early retirement has become so severe that 36 states have started to address this condition.

Some of the legislators say they have addressed this problem by requiring the employees to pay in a higher percentage of their salary to fund their pension. The consultant to the Legislature said this sounds good, but the burden actually falls on the back of the tax payer. He said that all salaries and benefits are funded by the private sector and it is the private sector which is going to have to foot the bill and pay off the debt.

So, it is a big coverup that most people in the state of Minnesota are unaware of. We need to elect legislators who will address the problem. We need to elect legislators who do not represent or are beholding to special-interest groups. Former legislators got us into this situation and it is going to take legislators who can make strong and painful decisions, who will get back to realistic expectations. Remember, each day that goes by using an 8 1/2 percent interest assumption makes the situation worse for our children and grandchildren. When we select candidates and vote for legislators, make sure we find out how they are going to address the problem. Are they going to sock it to the tax payer and private sector or are they going to gradually reduce entitlements and benefits? It will probably require some type of compromise, but whatever action is taken, it will be painful because of the promises made by past legislators.

 

Alan Arends is a member of the Freeborn County Republican Party.