An article
published by Bloomberg News (“New Math Deals Minnesota’s Pensions the Biggest
Hit in the U.S.,” Aug. 31, 2017), uses numbers reported under the
Governmental Accounting Standards Board (GASB) rules to paint an incomplete and
misleading picture of the financial health of Minnesota’s public pension plans.
The key
point to understand about numbers reported under GASB rules is that the true
health of a pension plan is determined not by GASB annual accounting rules but
by funding policy.
GASB
reporting is not intended to provide a picture of the funded status of a
pension plan. Instead, funded status is determined by an actuarial funding
methodology, the objective of which is to achieve an ultimate funded status of
100 percent. If the TRA reforms currently pending in the legislature are
enacted, TRA will be on that positive funding trajectory.
In
response to an increase in TRA liabilities caused by longer member lifespans
and reflected in the GASB numbers, the TRA Board of Trustees proposed $1.6
billion in benefit reductions and $92 million in annual contribution increases.
Unfortunately, the TRA proposed financial reforms failed to be enacted during
the past two legislative sessions (2016-2017). TRA will renew its request for
reforms in the 2018 session.
Enactment
of proposed pension reforms by the legislature would significantly improve the
numbers reported under GASB rules – as will the strong 15.1 percent fiscal 2017
investment return.
The
Bloomberg article claims that Minnesota has experienced “lackluster” investment
returns. In fact, the State Board of Investment has averaged an 8.7 percent
annual return over the past 30 years, consistently outperforming its peers
(public fund median over 30 years is 8.3 percent). Returns over 35 years have
averaged 10.2 percent per year.
Recent
numbers reported for GASB purposes lag one year and reflect investment returns
from fiscal year 2016, which were indeed lackluster at -0.10 percent. However,
for the fiscal year that ended on June 30, 2017, the SBI returned 15.1 percent
(public fund median for FY 2017 was 12.4 percent). GASB results for FY2017 thus
will swing dramatically in the other direction. The year-to-year GASB numbers
will fluctuate wildly and do not provide appropriate guidance for oversight of
pension funding, which is best viewed through a very long-term lens.
Minnesota’s
pension funds are not in crisis but do need constant monitoring and adjusting
and, with help from the state legislature and the governor, will be on sound
footing for many years to come.
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