This is something of a followup to the discussions from the radio last week. I did some looking at the “Comprehensive Annual Financial Report” from the North Dakota Retirement and Investment Office to see what I could find related to the position of the pensions in North Dakota. For those not aware, pensions are a huge issue across the country these days. They came under fire in the case of Detroit; unfairly blamed in my opinion for the eventual bankruptcy of the city. Recently the Illinois Supreme Court ruled that the state constitution prevented a renegotiation of the retirement benefits. We will see how that proceeds as Illinois is in a dire fiscal situation.
North Dakota is not in a dire fiscal situation, even with the recent drop in oil prices. However, looking at the annual report raises some concerns. The market value of assets in the Teachers Fund for Retirement (TFFR), the defined benefit pension for teachers, had $2,090,977,056. A different report gave a slightly lower number but I am not going to quibble here at this point. With over $2 billion in assets on hand you might think that are no problems. You would be wrong. The total pension liability at the same time was $3,138,799,773. That implies a net pension liability (NPL) of over $1 billion ($1,047,822,717 according to the financial statement).
Context is very important in these situations and few states have a better fiscal context than North Dakota right now. However, circumstances can and do change. The returns earned on assets are variable, and can be volatile. If asset returns start to diminish then gaining against the liability becomes more difficult. These types of pensions also rely on assumptions about mortality. (One of the reasons this caught my eye the last few weeks is that I start teaching a population analysis class next week for the grad students.) If those mortality assumptions are wrong, that is, people do not die as early as we expect, then our liabilities increase. Of course the reverse could happen and the liabilities shrink because people die faster than expected(economics is not called the dismal science for no reason).
Part of this discussion came about because JT asked about the likely queue forming for the legacy fund disbursements that are available first after June 30, 2017. According to the State Treasurer the legacy fund has more than $3 billion at this point. At the end of each biennium the earnings of the Legacy fund are to be transferred to the General Fund. In addition, there can be an expenditure of the principal, of up to 15%, subject to a 2/3 vote in each house of the legislature. One of the things I suggested last week as an option would be to improve the condition of this pension and other state obligations. Of course, I also suggested closing the defined benefit pension and starting a defined contribution pension for new hires.
There is a great deal to like about defined benefit pensions, but the sad fact is that they are subject to frequent manipulation. Unrealistic assumed returns allow for lower contributions and suddenly there is more money available for other programs, tax cuts, or other pet projects. When the obligations grow too large to ignore, and far to large to manage, the SOP is to hold up the pensioner as an enemy of the taxpayer and play one group off the other.
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