Greedy Government Workers Resist North Dakota Switch from Pension to 401K
Spokesmen for North Dakota school teachers and government workers are resisting proposals to put new employees into a 401(k)-style retirement savings plan. Both teachers and government workers now have pension plans with guaranteed retirement benefits. The pension funds are in financial trouble and North Dakota lawmakers are looking for solutions. A legislative committee is considering proposals to ease the state out of the pension business and put new workers into 401(k) type plans that they would control. Analysts say that idea would worsen the problems of the existing pension funds. Greg Burns of the North Dakota Education Association says the "defined contribution'' plans are tougher to maintain because workers have to make the investment decisions. Stuart Savelkoul is director of the North Dakota Public Employees Association. He says converting to 401(k) style plans would be expensive and benefits wouldn't be as good for public employees. - Workers resist ND switch from pension to 401K, Associated Press, September 22, 2010State Pension Plans Flawed
84% of state and local employees retain defined benefit coverage, compared to 21% of private sector workers.February 6, 2011
Rep. Bette Grande, R-Fargo - North Dakota's public pension plans are in tough shape, but we have made a contractual obligation, and more importantly, a promise to our teachers and state employees that we have to keep. Bills (1228, 1258) do not in any way turn back on the promises made.
But, it is fiscal malpractice to continue making new promises when we are having trouble meeting our past obligations. These bills will keep us from digging an ever deeper hole by transitioning new employees to a defined contribution plan like a 401(k).
These Bills are not anti-teacher or anti-state employee as the unions claim. I do not look at people first as teachers or state employees. I see fellow parents, grandparents, taxpayers and citizens. And I firmly believe that when you strip away the union rhetoric - and we understand the truth about these defined benefit plans -- that our teachers and state workers will agree with this approach. It is simply the right thing to do.
The problems with our public retirement plans are not new; these problems are the result of fundamental flaws in these plans. The math simply doesn't work. The poor stock market performance over the last 10 years has exposed the flaws, but the flaws were there from the start. These plans are complex and the inherent problems are masked as new employees are added every year, but that does justify continuing an unsustainable program.
From a budgeting standpoint these plans are a nightmare with growing, open-ended, liabilities that must ultimately be paid by the taxpayer. Times are good now in North Dakota with a strong economy led by energy and agriculture, but we fool ourselves if we think the good times will continue forever.
There are serious budget factors that are out of our control; the energy industry is at the whim of oil prices, the middle-east and the EPA. We are over reliant on revenue from Washington D.C. But Washington D.C is currently borrowing over 40 cents for every dollar it spends. That is not sustainable. We cannot paint ourselves into a budget corner. There are too many factors that are out of our control to ignore those we do control.
Critics argue that it will cost too much to change direction now, that we're somehow better off adding more and more new employees to the current plan...and making more and more new promises that our children will have to pay. The truth is it will cost much more in the long-term if we do not act now.
Others will claim "we're paying into the plan, and we should have the benefit." But that argument exposes a gross misunderstanding about how these plans work. The thinking is that you make contributions every year while you are working and those contributions and the investment earnings will provide your monthly retirement benefit. That would work, except for two problems:
1) your retirement is just as long, if not longer, than your working years and,
2) the amount you contribute each year is far less than your yearly retirement payment.
The Unions are asking the new employees to step up and pay in significant more amount of their salary into the plans to help pay for the promised payouts to current employees. We over promised, we can't afford it so we need our young people to pay more and hope that future generations will come in to bail them out. Our young people already have a ‘deal' like that with social security. That doesn't sound like leadership to me.
As people we can rationalize many things, we may even convince ourselves that we are entitled. But when we take a step back, look at the facts, determine the truth for ourselves, realize the true cost and who will have to pay the tab -- we make the right decision. We always have.
This argument is not about if we will leave a huge debt for our children and grandchildren -- but about how much that debt will be. It is time to do what is right.
(Rep. Bette Grande, R-Fargo, is chairman of the Government and Veterans Affairs Committee.)
Public Workers, Not Taxpayers, Should Shoulder Pension Risks
Having public pensions being so superior and far better than private retirement savings — and the inevitable backlash this would produce — is one of the unavoidable adjustments similar to falling house prices. This huge gap of public employees being so much better compensated than private employees became visible about a year ago even in just ordinary news reports in the papers, for those that read widely. Just like falling house prices, this will be adjusted, sometimes by drastic action (similar to a foreclosure being drastic). The bottom line is that taxpayers cannot be expected to make public employees far more comfortable than themselves. - Hal Horvath, Pension Envy, Pension Crisis, On Point Radio, July 28, 2010November 28, 2010
Say Anything Blog - At times it seems as though the journalists and editors in the North Dakota media exist in their own version of reality. Nothing illustrates that more than this paragraph about North Dakota’s “frugal” state government in an editorial about pensions from the Grand Forks Herald:
North Dakota’s reputation for frugal government extends to its pensions. For example, the Public Employees Retirement System offers only meager retirement health benefits. Also, the PERS plan does not make cost-of-living adjustments to its pensions. And while other states give many retirees 3 percent of salary for every year worked, the PERS plan’s number is closer to 2 percent.
North Dakota’s reputation for frugal government? Please. State spending in North Dakota has grown nearly 100% over the last four legislative sessions. Unless the word “frugal” is listed with a different definition in Herald opinion editor Tom Dennis’ dictionary than the one that’s listed in my dictionary, that’s a rather boldly inaccurate statement. And the notion that public worker benefits in North Dakota are “meager” is laughable. They may be “meager” only in relation to the excesses in other states. They’re considerably more than most North Dakotans working in the private sector get.
But this disconnect from reality aside, Dennis raises some good points about North Dakota’s pension short falls which, depending on whose projections you use, range anywhere from hundreds of millions of dollars to as much as $4 billion:
In North Dakota, the pension funds’ budget gaps grew because of the market crash. The funds counted on earning an annual return of 8 percent, and that worked — until it didn’t: The crash blew giant holes in the fund balances. The trouble is that the proposed solution — higher contributions from employees and their employers — still counts on those 8 percent returns.
That’s too high. Getting such returns demands risky investments, and that strategy leaves the funds vulnerable to market downturns. What happens when the next crash comes?
What happens is that taxpayers once again will be on the hook. The state must pay its pension obligations whether the funds earn 8 percent or not — and as North Dakota and other states can testify, the key word there is “not.”
Dennis proposed solution is a defined contribution pension system that’s already been adopted by Utah. What North Dakota has now is a defined benefits pension where workers are guaranteed a certain level of pension no matter how much money is or is not in the pension fund. This obviously leads to the shortfalls we’re seeing now when the pension fund under performs.
Under a defined contribution plan, which is the model the private sector uses, the amount the government contributes to a given worker’s pension is defined. In Utah, the state contributes 10% of a given worker’s salary to the pension fund. If the pension fund under performs, the state worker either accepts a smaller pension or makes up the difference from his/her own funds. If the pension fund over performs, the state worker can put the excess into a 401k plan.
This would be a vast improvement over the current system, but I wonder why if we’d be willing to go this far we wouldn’t simply chuck the entire pension system and simply emulate the private sector. Allow each worker to open a 401k plan. The state then contributes a percentage of the employee’s salary to that fund the investment of which is managed not by the state but by the individual workers.
Or, if the employee chooses not to participate in the retirement fund, they can take the state’s contribution as additional salary.
This allows each individual employee’s retirement funds to be managed by the employee and not some state-hired fund manager and state-appointed investment board North Dakota’s pension funds are currently managed.
I want each individual state employee to have the maximum amount of control over their own investments. A defined-contribution into an individually-managed retirement account accomplishes just that without burdening the taxpayer with the need for huge pension bailouts.
Pension Shakeup: Bill Would Close North Dakota Plans
January 21, 2011AP - North Dakota teachers and government workers fought a proposal Friday to close their financially troubled pension funds to new hires, saying the option would provide inferior retirement benefits to future workers for dramatically increased short-term costs.
"We believe that retirement should be a reward for a life's work," said Dakota Draper, president of the North Dakota Education Association. "In order for it to be rewarding, your retirement funds must be safe and secure."
Backers of the change said it would begin the slow, costly process of extricating the state from providing guaranteed pensions to government workers. Instead, lawmakers who favor the move want to establish tax-deferred savings accounts for public employees, similar to the 401(k) plans private companies offer.
"We're at the beginning of a very large and expensive problem here," said Rep. Scott Louser, R-Minot. "I view the current system as driving down the road in a broken-down vehicle that's running out of gas. If you stop and put gas in the vehicle, you can continue a little further, but you still have a broken vehicle."
The North Dakota House's Government and Veterans Affairs Committee reviewed separate bills Friday that would close both the Teachers' Fund for Retirement and the North Dakota Public Employees Retirement System's pension plan to newly hired workers. The committee took no immediate action on either bill.
Both measures are sponsored by the committee's chairwoman, Rep. Bette Grande, R-Fargo, who also headed an interim legislative committee that studied proposed pension changes for the last 18 months.
The teachers' bill would close the pension fund to new hires on July 1, 2012. The public employees' legislation would shut the fund Aug. 1.
Grande said her bills would not affect benefits for current public employees or pensioners, although some witnesses at Friday's hearing said they were apprehensive about the funds' continuing ability to pay benefits if they were not enrolling new members.
The Teachers' Fund for Retirement, which has about 9,900 working members and almost 6,700 retirees, is at about 70 percent of its ideal funding level, financial reports say. The funding level of Public Employees Retirement System, which has about 20,600 working members and 7,400 retirees, is at 73 percent.
Analysts say both funds are likely to exhaust themselves within 30 years unless lawmakers take steps to bolster them.
Groups representing teachers and state government employees want lawmakers to approve pension contribution increases on both employees and their employers to return the funds to health.
Chris Conradi, a consultant and actuary for the Teachers' Fund for Retirement, and Brad Ramirez, an actuary for the Public Employees Retirement System, said the shutdown option would be expensive in the short term.
Pension contributions would need to rise steeply, because there would be fewer employees paying into the funds to make up their deficits, they said.
The pension debate, which will be one of the 2011 Legislature's dominant issues, is focused on two different types of retirement plan.
The Teachers' Fund for Retirement and the North Dakota Public Employees Association both run what are called defined-benefit plans. Workers and their employers pay into a pension fund, with its investments managed by the state Retirement and Investment Office. Employees are assured a monthly benefit for life, which is calculated according to their salary history.
The two bills considered Friday would shift newly hired workers into what are called defined-contribution plans. The most prominent example of this is a 401(k), a retirement benefit offered by many private companies.
A defined-contribution plan allows workers to save a portion of their paychecks, which is sometimes supplemented by the company.
The contributions are not taxed until the employee begins withdrawing the money. Benefits are not guaranteed, but employees have control over how they are invested and what is done with any leftover money when they die.
Matt Quintus, 22, a Dickinson State University senior who is studying to be a high school science teacher, said the security of a traditional, guaranteed pension plan is attractive to young teachers as they decide where they will seek work.
"One of the attractions of staying here is knowing that I can earn a little less but not have to worry about my economic security," Quintus said. "This is because I know that under the current system, I will be guaranteed a retirement income. This bill takes that guarantee away."
[Editor's Note: Public school teachers are well compensated. They make much more than the average for U.S. private sector workers, and they often are even better compensated that others in the public sector, including federal civilian workers and the U.S. military.]
Stuart Savelkoul, director of the North Dakota Public Employees Association, said the option of raising contribution rates and keeping the traditional pension was more prudent.
Public employees are "sensitive to the fact that many in the private sector are not afforded defined benefit retirement plans," Savelkoul said. "However, that does not mean that the state of North Dakota ought to engage in a race to the bottom."
The Teachers' Fund for Retirement bill is HB1258. The North Dakota Public Employees Retirement System bill is HB1228.
North Dakota Public Pensions
As the stock market bubbled ever higher in the 1990s, managers of pension plans ratcheted up their expectations of future "permanent" growth, giving politicos the go-ahead to ramp up pension pay-outs. In essence, pension plans, which were once constructed on the long-term expectation of 4-5% returns on capital, now based future earnings and pay-outs on the stock market's "average return" of 8% annually. As any reasonable person might have foreseen, the bubblicious stock market of the 1990s was not a "new permanent plateau" but, in fact, a bubble which imploded. Real returns in the past decade have been literally half what was anticipated and, as a result, state and local governments are having to make up the difference with cash out of general fund tax receipts. As tax receipts plummet in the "slow-growth," jobless recession, then state and local governments are forced to gut their programs to fund the oligarchy / fiefdom's pension promises. - Blame the Fed for the Pension Crisis Because They Engineered It, Seeking Alpha, May 24, 2010Sunshine Review - The North Dakota Retirement and Investment Office (RIO) was established in 1989 to coordinate the activities of the State Investment Board (SIB) and the Teachers' Fund for Retirement (TFFR) as stated in Section 54-52.5-01 of the North Dakota Century Code.
Funding Levels
The state's pension liabilities can be calculated in a variety of ways, which yield different numbers. Below are the numbers as calculated by to the Pew Center on the States, the American Enterprise Institute and Professors Robert Novy-Marx of the University of Chicago and Joshua Rauh of Northwestern University, Kellogg Graduate School of Management.
| PEW (2008) | AEI (2008) | Kellogg (2009) |
| $546,500 | $4,099,053 | $3,600,000 |
Other information from the Pew Center on the States Feb. 2010 publication "The Trillion Dollar Gap":
| Latest liability | Latest unfunded liability | Annual required contribution | Latest actual contribution |
|---|---|---|---|
| $4,193,600 | $546,500 | $80,928 | $59,900 |
| Latest liability | Latest unfunded liability | Annual required contribution | Latest actual contribution |
|---|---|---|---|
| $123,776 | $81,276 | $6,085 | $6,450 |
| Number of pension plans | Pension assets ($bn) | Stated liabilities ($bn) | Funding status (% of tax revenue) |
|---|---|---|---|
| 2 | $2.9 | $3.6 | -212% |
This data is based on projected data from 2008 census data. In 2008, $1.94 trillion was set aside for pensions, but it is estimated that states have $5.17 trillion in unfunded liabilities.
Pension investigationThe state conducted a 4 month audit of the pension funds, found the following misappropriated funds:
- $35,000 on a sapphire and diamond necklace
- $10,000 for a rare copy of Montesquieu’s L'esprit des Lois
- $437,000 for three Queen Anne balloon-seat side chairs
- Hundreds of thousands of dollars on Steif teddy bears for Greenwood’s teddy bear collection, valued at over $1.5 million.
North Dakota presumes a 8.00% return rate on its pension investments.
Contribution RateContributions are based on the employee's monthly salary: 4.12% employer contribution; 4% employee contribution, and 1% for the retiree health insurance credit contribution for a total of 9.12% of your salary.
Members are vested in the system after 36 months of employment.
EligilibityEmployees are eligible to retire at age 65. Tier I employees may retire when their combined age and years of service equal or exceed 85. Tier II employers may retire when their combined age and years of service equal or exceed 90.
“The retirement plan is not a retirement. Retirement plans are not guarantees, and retirement plans are not rights.” - Rep. Betty Grande [R-Fargo]
“...401(k)s are working well in the private sector.” - Rep. Scott Louser [R-Minot]
“In 2009, some 50 million workers lost a total of at least $1 trillion in their 401(k) plans, according to the Center for Retirement Research at Boston College. Even when (or if) the stock market returns to its 2007 levels, boomers will have lost years of gains they were counting on to boost their savings. These boomers must now save like mad. Many will have to put off retirement, which means fewer opportunities for younger people looking for work.”- Robert Reich
“In a state that struggles to keep its young professionals here, do we want to add another reason for them to look elsewhere?” - Matt Quintus [Student-DSU]
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