For years I have warned against over optimistic return expectations on pension funds (See here, here, here, here, here, and here for starters). States like Illinois are known to have unrealistic pension expectations, but new rules forcing states into more rational calculations for their pension fund returns have outed Minnesota as another pension fund risk taker.
At Bloomberg, Martin Z. Braun reports that Minnesota’s pension fund liabilities have increased by $16.7 billion dollars using the new calculation. It’s amazing what fuzzy math can hide for so many years.
Thanks to more realistic return expectations, Minnesotans can now see that their politicians have left the state’s pension fund 53% funded, rather than the 80% they had claimed.
Perhaps scariest of all for America’s pensioners and taxpayers is that this phenomenon is not isolated to Minnesota. Braun writes:
The worsening outlook for Minnesota is in line with what happened nationally. Pension-funding ratios declined in 43 states in the 2016 fiscal year, according to data compiled by Bloomberg. New Jersey had the worst-funded system, with about 31 percent of the assets it needs, followed by Kentucky with 31.4 percent. The median state pension had a 71 percent funding ratio, down from 74.5 percent in 2015.
While record-setting stock prices boosted the median public pension return to 12.4 percent in 2017, the most in three years, that won’t be enough to dig them out of the hole.
Only eight state pension plans, in Minnesota, New Jersey, Kentucky and Texas, used a discount rate “significantly lower” than their traditional discount rate to value liabilities, according to July report by the Center for Retirement Research at Boston College.
“Because of that huge drop in the discount rate under GASB reporting, their liabilities skyrocket,” said Todd Tauzer, an S&P Global Ratings analyst. “That’s why you see that huge change compared to other states.”
Read more here.