New Pension Examination Reveals That State Pensions Will Be Insolvent Sooner Than Anticipated

Compass With Pension Text
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Minnesota Is Among the States with the Highest Pension Deficit

Minnesota now owes its workers’ retirement plans a debt of $33.4 billion, or about $6,000 for every resident, as new methods for measuring pension solvency are introduced.

Part of the reason that Minnesota has seen such massive growth in its debt to its pensioners and future-pensioners is not so much that the state did anything wrong or has been hit by some economic turmoil. Instead, the massive increase in funding issues comes from a new way of measuring pensions, meaning that a simple change to the math being done on the pensions saw the cost rise.

This is a result of new accounting standards that were put in place to prevent overly rosy projections by states concerning their pensions and the future stability of government-backed retirement plans. Due to the accounting shift, Minnesota in 2016 reported just having 53% of what it needed to foot the bill for its promised benefits, which is a far cry down from the 80% that the state claimed was accounted for a year earlier.

This change in math dropped the state from one of the best-funded state systems around to the seventh-worse in the entire country, according to data from Bloomberg.

Part of the issue was assumed returns of around eight percent which, in any market, is hard to achieve, let alone in fluctuations over decades. Not to mention that the state also counted on the money from the investments to help power the pension plan, without taking into account that money would have to be paid out eventually and that many of these plans would go broke far sooner than their projections showed.

The revised timelines and costs brought about from the new accounting practices have raised liabilities across the board.

Minnesota is hardly the only state affected. Across the country, funding rations declined in 43 states in the 2016 fiscal year as a result of the new accounting practices and other issues.

New Jersey and Kentucky were particularly concerning in their insolvency, with both states having little more than 30% of the state-funded system paid for, while the rest would be covered in debt or cutbacks.

In Minnesota, lackluster returns and years of shortchanging have taken a toll. The state’s pensions lost 0.1% in fiscal 2016.

 

Sources

New Math Deals Minnesota’s Pensions the Biggest Hit in the U.S.,” Bloomberg, August 31, 2017.

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