Public pensions in North Dakota

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North Dakota public pensions
Flag of North Dakota.png
Pension system
Number of pension systems 4
State pension systems: Public Employees Retirement System
Highway Patrolmen's Retirement System
Retirement Plan for Employees of Job Service North Dakota
Teachers' Retirement Fund
System type: Defined benefit plan
Pension health (2012)[1]
Fund value: $3,498,700,000
Estimated liabilities: $5,513,000,000
Unfunded liabilities : $2,014,300,000
Percent funded: 63.46%
Percent funded change: Decrease.svg5.39%[2]
Percent funded rank: 38[3]
Pension fund members (2012)
Total members: 56,199
Active members: 31,269
Other members: 24,930
Other state pension information
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Policypedia
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Pension policy
Public pensions
State public pension plans
Public pension health by state
North Dakota public pensions are the state mechanism by which state and many local government employees in North Dakota receive retirement benefits. Four systems administer benefits to eligible retirees: the Public Employees Retirement System (PERS), the Highway Patrolmen's Retirement System (HPRS), the Retirement Plan for Employees of Job Service North Dakota (RPEJS) and the Teachers' Retirement Fund.

According to the United States Census Bureau, the state also has 10 locally-administered pension systems.[4]

A 2012 report from the Pew Center on the States noted that North Dakota's pension system was funded at 72 percent at the close of fiscal year 2010, below the 80 precent funding level experts recommend. Consequently, Pew designated the state's pension system as cause for "serious concern."[5]

Taken together, the funding ratio for the state's pension systems decreased from 85.68 percent in fiscal year 2007 to 63.46 percent in fiscal year 2012, a decrease of 22.22 percentage points, or 25.9 percent. Likewise, unfunded liabilities increased from under $1 billion in fiscal year 2007 to more than $2 billion in fiscal year 2012.[6][7]

Features

Pension plans

According to the systems' Comprehensive Annual Financial Reports for fiscal year 2012, North Dakota had a total of at 31,269 active members in its retirement plans. Our membership figures divide plan participants into two broad categories: active and other. Active members are current employees contributing to the pension system. Other members include retirees, beneficiaries and other inactive plan participants (usually terminated employees entitled to benefits but not yet receiving them).[8]

The following data was collected from the systems' Comprehensive Annual Financial Reports. The "percentage funded" is calculated by taking the current value of the fund and dividing by the estimated amount of total liabilities. The assumed rate of return used to calculate fund value varied by system in fiscal year 2012 (see "Rate of return" below for more information). The Government Accountability Office (GAO) and Pew Research Centers cite a percent funded ratio of 80 percent as the minimum threshold for a healthy fund, though the American Academy of Actuaries suggests that all pension systems "have a strategy in place to attain or maintain a funded status of 100 percent or greater."[9][10] The column labeled "SBS figure" refers to a market liability calculation of the fund by the nonprofit organization State Budget Solutions. This analysis uses a rate of return of 3.225 percent, which is based upon the 15-year Treasury bond yield. The organization calls this a "risk-free" rate of return that would make it easier for states to achieve their pension funding requirements in the future. Since 2006, all private sector corporate pension plans have incorporated market costs into their funding schemes.[11]

Basic pension plan information -- North Dakota[6][7]
Plans Current value Percentage funded Unfunded liabilities Current members
State figure SBS figure[12] State figure SBS figure[12]
Public Employees Retirement System $1,627,400,000 65.1% N/A[13] $873,900,000 N/A[13] 21,091 active members
Highway Patrolmen's Retirement System $48,100,000 70.3% $20,300,000 145 active members
Retirement Plan for Employees of Job Service North Dakota $75,100,000 105.2% -$3,700,000 19 active members
Teachers’ Fund for Retirement $1,748,100,000 60.9% $1,123,800,000 10,014 active members
TOTALS $3,498,700,000 63.46% 32% $2,014,300,000 $7,308,162,000 31,269 active members

Annual Required Contribution

Annual Required Contributions (ARC) are calculated annually and are a sum of two different costs. The first component is the "normal cost," or what the employer owes to the system in order to support the liabilities gained in the previous year of service. The second component is an additional payment in order to make up for previous liabilities that have not yet been paid for. According to a report by the Pew Center on the States, in 2010 North Dakota paid 66 percent of its annual required contribution.[5][14]

On June 25, 2012, the Government Accounting Standards Board (GASB) approved a plan to reform the accounting rules for state and local pension funds. These revised standards were set to take effect in fiscal years 2013 and 2014.[15] As a result, ARCs were removed as a reporting requirement. Instead, plan administrators and accountants will use an actuarially determined contribution or a statutory contribution for reporting purposes.[16]

ARC historical data
Fiscal year PERS[6] HPRS[6] RPEJS[6] TRF[7]
Annual Required Contribution (ARC) Percentage contributed Annual Required Contribution (ARC) Percentage contributed Annual Required Contribution (ARC) Percentage contributed Annual Required Contribution (ARC) Percentage contributed
2012 $91,458,077 42% $2,170,739 66% N/A N/A $69,373,794 66.5%
2011 $82,909,840 39% $1,744,270 74% N/A N/A $65,112,696 68.4%
2010 $54,157,866 56% $1,312,591 91% N/A N/A $52,053,217 76.5%
2009 $40,327,067 69% $1,025,737 109% N/A N/A $41,986,174 89.3%
2008 $35,875,117 70% $905,591 117% N/A N/A $44,114,585 76.4%

Historical funding levels

Historical pension plan data - all systems[6][7]
Year Value of assets Accrued liability Unfunded liability Funded ratio
2007 $3,377,100,000 $3,941,700,000 $564,600,000 85.68%
2008 $3,647,100,000 $4,193,600,000 $546,500,000 86.97%
2009 $3,642,100,000 $4,475,800,000 $833,700,000 81.37%
2010 $3,586,500,000 $4,977,500,000 $1,391,000,000 72.05%
2011 $3,596,600,000 $5,224,100,000 $1,627,500,000 68.85%
Change from 2007-2011 $219,500,000 $1,282,400,000 $1,062,900,000 -16.83%

Rate of return

PERS, HPRS and TRF all presumed 8 percent return rates on their pension investments in 2012.[6]Cite error: Invalid <ref> tag; invalid names, e.g. too many RPEJS presumed a 7.5 percent return rate on its pension investments in the same period.[6]

Analysis

Percent funded status of pension plans
in the 50 states as of November 2013
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Note: The data in this map was compiled from state CAFR reports and Actuarial Valuation documents. Figures reflect a combination of all of the state pension plans.
Funded ration of state public pension plans as compiled by State Budget Solutions.

According to a 2012 analysis by the Pew Center for the States, most state pension plans assume an 8 percent rate of return on investments.[17] Critics assert that this assumption is unrealistic, citing changing market conditions and significantly lower investment returns across the board over the past several years.[18] When states lower the rate of return in an effort to accurately predict investment earnings, it increases the current plan liabilities, thereby lowering the percent funded ratio and causing the ARC to increase. This is because future plan liabilities are discounted based on the rate of return, so smaller expected investment returns result in larger actuarially accrued liabilities.[19] For example, on September 21, 2012, the Illinois Teachers Retirement System voted to lower its rate of return from 8.5 percent to 8.0 percent. This change increased the state's fiscal year 2014 ARC from $3.07 billion to $3.36 billion.[20] Similarly, when California's CalPERS reduced its projected annual rate of return from 7.75 percent to 7.5 percent in March 2012, it cost the state an additional $303 million for fiscal year 2013.[21]

The 2008 financial crisis had a devastating effect on pension plans nationwide and has resulted in slower economic growth and increased market volatility. In light of this, some market strategists find the 8 percent assumption to be overly ambitious. Stanford University Finance Professor Joshua Rauh stated that using past investment performance in this economic climate was "dangerously optimistic."[22] Advocates for a lower assumed rate of return argue that the standard assumptions could cause pension fund managers to engage in more risky investments and imprudent stewardship of public funds. Further, if pension plans were using more conservative assumptions, such as the 3 or 4 percent assumed rate of return used in the private sector, and the plans grew more quickly than expected, the fund would have a surplus and smaller future ARCs, which would be preferable to using optimistic assumptions and potentially being caught with larger-than-expected deficits.[23][24][25][26][27]

On the other hand, traditional public pension plan advocates argue that the dip observed in recent years is not sufficient proof of a long-term, downward trend in investment returns. According to Chris Hoene, executive director at the California Budget Project, "The problem with [the market rate] argument is there isn’t significant evidence other than the short term blip during the economic crisis that there’s been that shift. It’s a speculative argument coming out of a very deep recession."[22]

The National Association of State Retirement Administrators compiled data on the median annualized rate of return for public pensions for the 1-, 3-, 5-, 10-, 20-, and 25-year periods ending in 2013. While the median annualized rate of return failed to meet the 8 percent assumption that most public pensions assume over the 5- and 10-year periods, it was just shy (7.9 percent) over the 20-year period, and it exceeded 8 percent for the 1-, 3-, and 25-year periods. It is important to note that the NASRA data is reporting the median returns, indicating that even though median annualized returns exceeded 8 percent in the 25-year period, the investment portfolios for half of the examined public pension funds failed to meet an 8 percent assumed rate of return.[28]

In September 2013, the nonprofit organization State Budget Solutions published an analysis of state pension funding levels. In its calculations, State Budget Solutions used a 3.2 percent rate of return, the 15-year Treasury bond yield as of August 21, 2013, to discount plan liabilities.

The research found that in all states combined, state public employee pension plans have only 39 percent of the assets they need to cover their promised payments—a $4.1 trillion gap. According to the report, North Dakota's public pension plans were 32% funded, making it the 41st most funded state.[29]

Moody's report on adjusted pension liabilities

On June 27, 2013, Moody's Investor Service released its report on adjusted pension liabilities in the states. The Moody's report ranked states "based on ratios measuring the size of their adjusted net pension liabilities (ANPL) relative to several measures of economic capacity." In its calculations of net pension liabilities, Moody's employed market-determined discount rates (5.67 percent for North Dakota) instead of the state-reported assumed rates of return (8.00 percent for North Dakota's largest plan as of July 1, 2011).[30]

The report's authors found that adjusted net pension liabilities varied dramatically from state to state, from 6.8 percent (Nebraska) to 241 percent (Illinois) of governmental revenues in fiscal year 2011.[30]

The adjusted net pension liability for North Dakota in fiscal year 2011 was ranked the 38th highest in the nation.[30] The following table presents key state-specific findings from the Moody's report, as well as the state's national rank with respect to each indicator.

Adjusted net pension liabilities (ANPL) relative to key economic indicators - North Dakota
Governmental revenue* Personal income State GDP Per capita
State findings 61.2% 10.1% 8.1% $4,781
National ranking 19th 13th 17th 13th
*Moody's uses governmental revenues as reported in each state's consolidated annual financial reports; this includes not only state-generated revenue, but federal funds, as well.[30]

Pension fund management fees

See also: Public pension fund management fees

In July 2013, the Maryland Public Policy Institute (MPPI) and the Maryland Tax Education Foundation released a report detailing the fees paid for the management of state pension systems. According to MPPI, the 10 state pension funds that paid the most in management fees relative to net assets experienced lower returns over a five-year period than the 10 state pension funds that paid the least in management fees. For example, in fiscal year 2012 South Carolina's pension system paid approximately $296.1 million in total management fees (1.31 percent of total net assets at the beginning of the fiscal year) and its five-year rate of return was 1.46 percent. By contrast, Alabama's pension system paid roughly $13.3 million in management fees (0.05 percent of total net assets) and its five-year rate of return was 7.53 percent.[31]

The table below presents the information collected by MPPI for North Dakota and surrounding states. For each state's pension system, total net assets are listed (both for the beginning and end of the fiscal year in question), as well as the total amount paid in management fees. In addition, the rates of return for the pension systems are presented. Compared to surrounding states, North Dakota had the lowest total net assets and total management fees.

Public pension fund management fees, 2011-2012
State Fiscal year Total net assets at the beginning of the year Total net assets at the end of the year Total management fees Management fees as a percentage of total net assets at the beginning of the year Five-year rate of return for the pension fund
North Dakota 2012 $3,743,377,317 $3,654,079,659 $19,081,399 0.51% 0.32%
Minnesota 2012 $53,069,265,000 $52,887,392,000 $64,886,000 0.12% 2.30%
Montana 2012 $8,305,942,274 $8,304,899,027 $43,312,842 0.52% 1.22%
South Dakota 2012 $7,936,269,496 $7,842,524,241 $35,142,279 0.44% 2.10%
1"Three states— Hawaii, Nevada and Rhode Island—were excluded because they hadn’t published CAFRs for fiscal years ending December 31, 2011 or later. West Virginia was excluded because its June 30, 2012 CAFR lacked sufficient disclosure."[31]
Source: Maryland Public Policy Institute, "Wall Street Fees, Investment Returns, Maryland 49 Other State Pension Funds," July 1, 2013

Reforms

Proposed reforms

2013

S.B. 2059

Introduced by the Senate Committee on Government and Veterans Affairs, S.B. 2059 provided for increased employer and employee contributions to the Highway Patrolmen's Retirement System and the Public Employees Retirement System. After clearing the Senate on February 20, 2013, the bill failed to pass the House on March 25, 2013.[32]

Local public pensions

See also: Local government public pensions

According to the United States Census Bureau, the state has 10 locally-administered pension systems.[4]

Transparency

See also: Public pension disclosure and Governmental Accounting Standards Board
  • Information regarding pension funds is readily available on the website of each fund. Neither the names of pension recipients, nor the amounts disbursed to those recipients, are not readily available.
  • Investments in the state pension plans are overseen by the State Investment Board. Individual fund investment performance is reported in each fund's CAFR.[33]
  • North Dakota mandates that any deals between private lawyers and the government in excess of $150,000 be approved by an emergency commission.[34]

Recent news

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North Dakota Public Pensions News Feed

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See also

Additional reading

External links

References

  1. Figures below are compiled by adding up all state pension plans
  2. This figure is derived by calculating the percent difference between the current year's funding level and the system's percent funded from the prior year.
  3. Rank is relative to the 50 state pension programs. "1" refers to the healthiest pension plan while "50" would be the least well-funded plan.
  4. 4.0 4.1 "Public Employee Retirement Systems State- and Locally-Administered Pensions Summary Report: 2010," United States Census Bureau, April 30, 2012
  5. 5.0 5.1 Pew Center on the States, "Widening Gap Update: North Dakota," June 18, 2012
  6. 6.00 6.01 6.02 6.03 6.04 6.05 6.06 6.07 6.08 6.09 6.10 North Dakota Public Employees Retirement System, "2012 Comprehensive Annual Financial Report," accessed November 14, 2013
  7. 7.0 7.1 7.2 7.3 7.4 North Dakota Retirement and Investment Office, "2012 Comprehensive Annual Financial Report," accessed November 14, 2013
  8. Organisation for Economic Co-operation and Development, "Pensions Glossary," accessed November 27, 2013
  9. United States Government Accountability Office Report to the Committee on Finance, U.S. Senate, "State and Local Government Retiree Benefits: Current Status of Benefit Structures, Protections, and Fiscal Outlook for Funding Future Costs," September 2007. accessed October 23, 2013
  10. American Academy of Actuaries, "Issue Brief: The 80% Pension Funding Standard Myth," July 2012. accessed October 23, 2013
  11. Governing Magazine, " Is There a Plot Against Pensions?" October 14, 2013
  12. 12.0 12.1 State Budget Solutions, "Promises Made, Promises Broken - The Betrayal of Pensioners and Taxpayers," accessed September 20, 2013
  13. 13.0 13.1 Analysis only available for system totals and not individual funds.
  14. Government Accounting Standards Board, "Annual Required Contribution (ARC)," accessed October 17, 2013
  15. Reuters, "Little-known U.S. board stokes hot pension debate," July 10, 2012
  16. State Budget Solutions, "GASB's ineffective public pension reporting standards set to take effect," June 5, 2013
  17. "The Widening Gap Update,” Pew Center on the States, accessed October 17, 2013
  18. The New York Times "Public Pensions Faulted for Bets on Rosy Returns," May 27, 2012
  19. Benefits Magazine "Public Pension Funding 101: Key Terms and Concepts," April 2013. accessed October 23, 2013
  20. Crain's Chicago Business "State teachers pension board lowers expected rate of return," September 21, 2013. accessed October 23, 2013
  21. Huffington Post "California Pension Funds Expect Lower Investment Return," March 14, 2012. accessed October 23, 2013
  22. 22.0 22.1 Governing "Expert: Governments Are Masking Their Pension Liabilities ," October 25, 2013. accessed October 25, 2013
  23. The Washington Post "Kansas’s pension funding gap just grew by $1 billion," September 6, 2013. accessed October 25, 2013
  24. Topeka Capital-Journal "KPERS' unfunded liability rises to $10.2B," September 4, 2013. accessed October 25, 2013
  25. Wall Street Journal "Pensions Wrestle With Return Rates," October 10, 2011. accessed October 23, 2013
  26. The Courant "Promising Too Much On Public Pensions," August 10, 2012. accessed October 23, 2013
  27. Business Wire "NCPERS 2013 Survey: Public Pension Plans Report Increasing Confidence, Lower Costs, Growing Returns," October 22, 2013. accessed October 25, 2013
  28. National Association of State Retirement Administrators "Issue Brief: Public Pension Plan Investment Return Assumptions," October 2013. accessed October 23, 2013
  29. State Budget Solutions, "Promises Made, Promises Broken - The Betrayal of Pensioners and Taxpayers," accessed September 20, 2013
  30. 30.0 30.1 30.2 30.3 Moody's Investor Service, "Adjusted Pension Liability Medians for US States," June 27, 2013
  31. Cite error: Invalid <ref> tag; no text was provided for refs named report
  32. North Dakota Legislative Branch, "Bill Actions for SB 2059," accessed November 15, 2013
  33. North Dakota Retirement and Investment Office, "Publications and Reports," accessed November 15, 2013
  34. Wall Street Journal Progress on Pay to Play," February 12, 2010