Bloomberg Markets recently released a bombshell of a story on Minnesota's public-pension system. "New Math Deals Minnesota's Pensions the Biggest Hit in the U.S." It reported that "Minnesota's debt to its workers' retirement system has soared by $33.4 billion, or $6,000 for every resident, courtesy of accounting rules. The jump caused the finances of Minnesota's pensions to erode more than any other state's last year … ."
Bloomberg has called attention to the fact that the financial stability of Minnesota pensions, relative to other states, has plummeted, and that even judged against its own standards, the system is in big trouble. The system admits to an $18 billion unfunded liability for state, local and school district employees. But the Bloomberg report puts our total unfunded liability at $108.9 billion. That's more than $20,000 for every resident.
A new Bloomberg study applied something called GASB reporting (Governmental Accounting Standards Board) to public-pension funds. Minnesota fell from having a system that was about 80 percent funded, and 30th in the nation, to having the seventh-worst-funded in the country, with only 53 cents on the dollar to pay pension promises. The study, by the way, lumps state and municipal funds together. In reality, each has its own funding ratio, but Bloomberg did that to give us the big picture.
When applying the same standards to public funds across the country, it makes sense that Minnesota fell to nearly the bottom. This is because the state has failed to move as fast as others in lowering expectations about what it can earn on pension investments and in updating how it calculates its liabilities.
Does this mean retirees are only going to get 53 cents on the dollar? Not yet, but only because pensions are guaranteed under the law. But to keep those pension promises, the funds are running massive deficits. They make up the shortfall by taking big risks in the market, taking more from taxpayers and using current employee contributions to shore up the funds. It's a Ponzi scheme. At some point, the game will be up.
Private-sector pensions have always been required under federal law to follow strict and very conservative accounting standards known as FASB. Public-sector pension funds, however, are not held to those same standards. GASB is only a reporting standard; it does not set actual funding policy.
In fact, public-pension funds, which are controlled by government unions and politicians, are in charge of how pensions are funded and reported. When funds hit a rough patch, unions look for a solution they can sell to members, and legislators look for a solution that won't hurt them at the polls.
GASB reporting standards were updated after the 2008 financial crisis. The idea was that if responsible officials had an accurate accounting, they would do a better job of managing the funds. GASB is like standing in front of the mirror — naked.