Photo courtesy of Minnesota Public Radio

Photo courtesy of Minnesota Public Radio

Over the past few couple of years, when they aren’t concerning themselves with passing laws recognizing the constitutional rights of gays to marry and approving subsidies for the National Football League’s Vikings team’s new stadium, Minnesota Gov. Mark Dayton and the state legislature have wrangled over how to address the insolvencies of its defined-benefit pensions, including the teachers’ pension for those working for St. Paul’s traditional district and the state’s emergency service workers. In fact, last week, the state’s lower house passed what is being called an “Omnibus Pension Bill“, which includes a plan for the North Star State to provide $7 million in subsidies every year to the St. Paul teachers’ pension just in order to address its officially-reported deficit of $589 million (as of 2012).

statelogoYet it is quite likely that Dayton and his colleagues have been addressing the issue based on faulty officially reported pension data coming out of the state’s Teachers’ Retirement Association and other pensions.  Thanks to inflated assumed rates of return on investments, and other practices noted earlier this month in a Dropout Nation Podcast (and in other reports this year) that have allowed the pensions to not account for investment losses, the shortfalls for the state’s teachers’ pensions are higher than officially reported. 

Let’s start with TRA, which isn’t exactly faring well. Between 2006 and 2012, its officially reported pension deficit increased by nearly a three-fold thanks in part to the financial meltdown and a 32 percent increase in annuity payouts over that same period. The hits keep coming. MTRA reports an official pension shortfall of $6.2 billion for 2012, a 23 percent increase over the previous year. But those numbers are still not close to reality. For one, TRA’s official deficit doesn’t include $119 million in unrecognized investment losses between 2009 and 2012 that aren’t on the books. The second problem lies with its annual rate of return of 8.35 percent — a combination rate based on a move made by the legislature last year to require the pension bring down its rate of return assumptions down slightly to 8 percent for five years, then increase it back to 8.5 percent for years afterward — which isn’t even close to reality. In fact, TRA lost $1 billion in 2012; only unrealized gains from 2010 and 2011 offset the numbers. If one adds in the $119 million in unrecognized losses, its reported deficit would increase to $6.3 billion.

But Dropout Nation took a closer look at the numbers based on a modified version of a formula developed by Moody’s Investors Service which is geared toward fully revealing pension shortfalls. Under this model, the rate of return is reduced to a more -realistic 5.5 percent based on the performance of the Standards & Poor’s 500 and other indicators used by money managers. The results are amazing. Based on Dropout Nation‘s calculations, TRA’s true pension deficit is $8.6 billion, or 38 percent more than officially reported. Based on a 17 year amortization, Minnesota taxpayers would have to pay out an additional $504 million annually just to pay down the insolvency; this is more than the $485 million contributed annually by districts and teachers (and ultimately, taxpayers) into the pension. Even if a 20-year amortization schedule was used,  taxpayers would still have to shell out an additional $430 million just to shore up the pension.

But this analysis doesn’t include the $119 million in unrealized losses. Add those in and then conduct the formula, and TRA’s likely insolvency increases to $8.7 billion. On a 17-year amortization scale, Minnesota taxpayers would have to pay an additional $514 million a year just to shore up the pension; on a slightly easier 20-year payment schedule, it would be $437 million. Either way, taxpayers would have to pay out double what is currently being contributed to the system.

The problem for Minnesota isn’t just limited to TRA. There’s also the teachers’ pension in St. Paul, which reports an official deficit of $589 million. But that doesn’t include $30 million in unrecognized losses. Add those losses in and the officially reported deficit increases to $619 million. But because the St. Paul Pension assumes a rate of return of 8 percent — in spite of the fact that it has lost millions over the past four years, including $82 million in 2012 — that number is unrealistic. Using the modified Moody’s formula and just calculating the officially reported deficit, St. Paul’s actual pension deficit is likely $799 million, or 36 percent higher than officially reported. Based on a 17 year pay down schedule, St. Paul and Minnesota taxpayers would have to hand off an additional $47 million a year just to cover the shortfall, or more than the $39 million contributed into the pension right now; a slightly more-lenient 20 year amortization schedule would require taxpayers to put down $40 million annually. If one includes the unrecognized losses into the formula, St. Paul’s pension deficit is likely $840 million. Based on a 17-year amortization, taxpayers would have to cough up an additional $49.million to cover the shortfall; it would be an additional $42 million based on a less onerous 20-year schedule.

Then there is the Duluth Teachers’ Retirement Fund, which will receive  $6 million in subsidies as part of the proposed pension plan in order to deal with a pension deficit that has increased by 50 percent between 2010 and 2011 (the latest years available). The pension officially reports a deficit of $86 million for 2011. But that number doesn’t include $21.7 million in unrecognized losses from the past four years. If included, the pension deficit would increase significantly to $108 million. Even those numbers are still low because of the extremely inflated 8.5 percent rate of return. Based on Dropout Nation‘s analysis just looking at the officially reported deficit, Duluth’s pension shortfall is more likely to be at least $120 million, or 40 percent more than officially reported. Based on a 17 year amortization schedule, taxpayers would have to shell out an additional $71 million — or more than double the $5.9 million currently contributed in 2011 — just to shore up the pension; it would $6 million under a slightly less-onerous 20 year schedule. Add in the unrealized losses and then do the calculations, and the Duluth pension deficit is likely $151 million. Based on a 17 year schedule, taxpayers would have to pay out an additional $8.9 million a year just to shore up the pension; it would be $7.5 million based on a less-costly 20 year pay down schedule.

All together, Minnesota faces $9.7 billion in teachers’ pension deficits, far greater than the numbers reported. Dayton should ask his colleagues to amend the current bill to require all pensions to adopt realistic rate of return assumptions, report honest numbers on their financial conditions, and begin the hard conversation about overhauling teacher compensation (as well as compensation for other employees in the public sector). As with other states Dropout Nation has covered this year, solutions aren’t possible without honest discussions about the insolvencies facing taxpayers, and ultimately, our children.