As a former civil service employee of the University of Minnesota, somewhere between 4.0-4.75 percent (in pre-tax dollars) of my pay was deducted from my paycheck every two weeks and deposited in the Minnesota State Retirement System (MSRS) during my four-and-a-half years of employment there. It was mandatory. When I was hired in July 2006, the rate was 4 percent and the University “matched” the deduction with 4 percent. When I was laid off in January 2011, the deduction and “match” rates were 4.75 percent. The Minnesota Legislature passed a law in 2006 requiring that the deduction and “match” increase by 0.25 percent each year from 2007-11.
Except the University “match” isn’t mine. The University match isn’t credited to individual accounts; instead it’s used to help pay retiree benefits. So it’s really not a match at all; it’s a guaranteed return for the MSRS pension fund.
Never mind that my manager, like all professional administrative and academic employees, contributed 2.50 percent of her pre-tax salary to a 401(a) retirement plan and received a hefty 13 percent match from the University. Only her University match actually, really went into her personal account every two weeks.
If the University wasn’t set up as a system of castes, using a plantation model it wouldn’t work. I get it; and I knew that when I signed on. But that’s not what this article is about. This is about the smoke and mirrors that is is public employee pension systems, including the one in Minnesota.
Every quarter MSRS sends a print newsletter (.pdf; 6.2MB) extolling what a great job it’s doing investing my (and the University’s money) on my behalf. Well, at least half of what goes in under my name is for my benefit. The newsletter I just received is a doozy. After being told every quarter for the four-and-a-half years I was a University of Minnesota employee that everything was just peachy, I learn that was pretty much total bullshit. But now the storm has passed and thanks to the deft investing skills of the Minnesota State Board of Investment everything is— wait for it—peachy once again. “In simplest terms, MSRS has reduced expenses and increased savings,” writes MSRS Executive Director Dave Bergstrom. “And, this means MSRS is taking the first steps toward financial recovery for the pension plans it administers.”
Bergstrom attributes the remarkable turnaround to two factors: The Minnesota Legislature agreed to lower MSRS’s future liabilities (this would be the “reduced expenses” to which Bergstrom refers). And an investment return of 15.2 percent (this would be the “increased savings” to which Bergstrom refers) between 1 July 2009 and 30 June 2010.
And those “reduced expenses” and lowered “future liabilities” aren’t at all what you and I think they are. Reducing expenses to you and me means that if we’re spending US$500 on internet connectivity each month and reduce it to US$250 each month, we’ll see reduced expenses over the next year of US$3,000 or 50 percent. That’s not what “reduced expenses” means in the case of MSRS. In 2010, the Minnesota Legislature agreed to a shell game proposed by MSRS.
The legislation as passed reduced MSRS’s liabilities by more than US$750 million by three sleight-of-hand maneuvers that look and sound like reducing expenses—like buying fewer paper clips—but in reality diminish the quality of life of retirees in the MSRS plans:
- Lowered future post-retirement increases from 2.5 percent to 2 percent
- Lowered the amount of increase for employees who have left employment but will collect benefits later
- Lowered the interest rate paid on lump sum refunds from 6 percent to 4 percent
On 03 June 2007, the MSRS General Plan was roughly 98 percent funded. MSRS suffered a 5 percent market decline in 2008, and a 19 percent decline in 2009. By 30 June 2009, the end of fiscal year 2009, the MSRS General Plan was less than 66 percent funded, “taking into account all market losses,” according to Bergstrom.
Look, I can wield a mean spreadsheet and calculate return on investment, discount rates, rate of return, amortization, and all the rest so long as someone who knows what they’re doing sets up the spreadsheet for me. That’s right friends and neighbors, I still count on my fingers. But here’s the part of Bergstrom’s ciphering that plumb evades me. You started with a pension fund that was 98 percent funded. It lost 5 percent in the next year—that makes it 93 percent funded, right? The pension fund lost 19 percent the year after that, meaning that the pension fund is still 74 percent funded, right? How in the hell did you drain it to less than 66 percent funded?
Second question: Bergstrom claims a 15+ percent return for fiscal year 2010. By my tally (yes, on my fingers) that means the MSRS General Plan pension fund should be funded to the tune of 89 percent. But Bergstrom’s calculator must be using wacky batteries because he claims, “The investment gains have helped stabilize the funding, and the General Plan is now 75 percent funded.” It could get even wackier: “Fiscal year 2011 returns have been positive as well,” write Bergstrom. “From 1 July 2010 through 30 December 2010, the rate of return for the fiscal year is 16 percent.” Uh, that’d be for the first six months of fiscal year 2011, Dave. There’s six more months to go. Oh, and another thing, Dave: Investments are not “savings”—investments carry risks; savings don’t.
I’m not necessarily saying that Bergstom’s numbers aren’t accurate—they well may be. What I’m saying is that I can’t understand them. After being self-employed for more than 30 years, I’ve seen a lot of wacky numbers (nothing’s wackier than any traditional publisher’s royalty statement; nothing). Combine my inability to understand Bergstrom’s numbers and the “reduced expenses” sleight-of-hand maneuvering with the Minnesota Legislature and I know one thing for sure: I’ll be taking my lump sum refund before it drops to the 4 percent interest rate in June and rolling it over into something I can understand.
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