Sunday, February 21, 2010
Standard Article by Brett Narloch
Issue: Budget & Spending
Current and retired state and local public employees participating in the public pension system in North Dakota must soon come to grips with the fact that the system many of them are relying on for retirement is headed towards insolvency. Legislators will soon have to make tough choices about the future of the pension system.
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This report is based on a set of videos created by the executive director of the pension system, Sparb Collins. The following is a short primer on how the system works and - because legislative solutions need to be presented to the Employee Benefits Programs Committee by March 2010 - an idea to ensure the long-term sustainability of the system.
The North Dakota Public Employees Retirement System's (NDPERS) mission is to administer a benefit program for North Dakota's public employees. The system receives contributions from employee members, totaling 8.12% of salaries - 4.12% employee contribution and 4% employer contribution. The state pays the entire 8.12% for state employees. Members are vested in the system after 36 months of employment. The system invests the contributions in various different areas, including domestic and international equities and fixed-income areas.
According to a video created by the executive director of NDPERS, Sparb Collins, there are 20,174 non-retired members in the system, 55% are state employees and 45% are employed by political subdivisions (county, city, school districts, etc...). There are 7,209 retirees in the system. In all, $80 million in pensions were paid out in FY2009.
The state also offers a defined-contribution option for employees, which started in 2000. However, this plan is only offered to employees who are in positions not classified by the Human Resources Management Services division of the state. The judicial branch and higher education system also do not participate in the defined-contribution plan. At the end of FY2009, the plan only had 300 employees.
The system, like a lot of other public and private pension systems, has been shaken dramatically during the national recession. According to Collins, during FY2009, the system's assets lost 24.42% of its value. Since the goal of NDPERS is 8% growth per year, they missed their goal by 32.42%. The system's unfunded liabilities - the amount of benefits earned by members minus the value of the system's assets - sky-rocketed from $127.8 million in FY2008 to $284.1 million at the end of FY2009, an increase of 122%. The system's unfunded liabilities grew 272% since FY2004.
Unfortunately, relying on the stock market to rebound will not bring the system to solvency. If the system earns between 8% and 16% during FY2010, then it would need to earn between 9.55% and 10.14% per year for the next 20 years to stabilize. The system is considered stabilized when the value of its assets are at least 70% of its liabilities.
To put this goal in perspective, since 1977, the average annual rate of return for the system has been 9.59% not including FY2009 when the system lost 24% of its value. In the past 20 years, including FY2009, the average annual rate of return has been 7.24%. Relying on the stock market alone will not ensure a sustainable system.
Collins has also shown that reductions in benefits, including increasing the number of years of employment needed to be vested in the system and increasing the number of years of work needed before retirement, do not stop the downward trend in the value of the system and certainly do not improve the system's situation.
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Increasing contributions from members, the state, or both does have a positive impact on the long-term viability of the system; however, legal and political hurdles stand in the way of those increases. An increase in the percentage paid by the state becomes a fiscal issue where taxpayers would be forced to pump money into NDPERS to sustain it. Taxpayers may not be willing to contribute more.
Increasing the portion paid by the members reduces the take home pay of employees, who may then call for bigger increases in wages to offset the loss in take home pay. Of course, that would require more taxpayer investment in the system. That option may also make it harder to recruit new state employees as wages would be less competitive.
Furthermore, according to Collins, it is unclear if it is legal to change benefits or contribution percentages for members who are not retired - it is, in fact, illegal to changes benefits for retired members.
The state's actuaries did not run any scenarios where combinations of the options were scored. It is unclear what effect using parts of the three options - increasing contributions, relying on stock market increases, and benefit cuts - would do to the sustainability of NDPERS. One idea that Collins has not yet discussed is turning the entire system into a defined-contribution plan instead of a defined-benefits plan.
Opening up the NDPERS's defined-contribution (DC) plan to all workers would have a dramatic impact on the system's bottom line. A DC plan, similar to a 401k plan, would allow the employees and the employer to contribute a defined amount of salaries and wages - say, the current 8.12% - but the state would not have to worry about ensuring the viability of the system. Instead, the benefits paid out would directly correspond to the performance of the system, rather than leaving the system short of funds during fund mismanagement or a national recession. Instead of raising taxes or diverting money from other priorities, retirees would receive a lower pension.
If reforming the entire system and including current members proves to be too daunting, the next best money-saving option would be to put new NDPERS members into DC plans. Michigan, Alaska, and the District of Columbia have these types of systems.
In March, NDPERS will submit its policy recommendations to the Employee Benefits Programs Committee. Hopefully, a more widely available defined-contribution plan is on the table.