For Two Decades, North Dakota Has Failed to Properly Fund Its Public Pensions

The spread of COVID-19 has wreaked havoc on financial markets, producing one of the fastest transitions from a bull to a bear market in the history of Wall Street. This major decline isn’t just a problem for businesses and our individual retirement accounts, it’s a problem for state and local governments and the already stressed public pension plans that millions of workers and retirees depend on.  Public pension systems like North Dakota Public Employees Retirement System and North Dakota Teachers’ Fund for Retirement never fully recovered from the last financial crisis, making them particularly vulnerable now.

Public pension systems are funded by contributions from workers and employers. These contributions are then pooled and invested to earn a return. The assets accumulated within the fund are used to pay out retirement benefits over time. Pension managers and actuaries have to prudently manage these funds to ensure pension systems remain solvent. Market downturns complicate this. When investment returns fail to meet the return assumptions, the pension debt grows.

In the five years following the Great Recession, market returns for TFFR and NDPERS averaged -1.2 percent and -0.29 percent, respectively, well below the 8.0 percent return assumptions used for the plans at the time.

The Great Recession manifested into serious losses. In July of 2007, NDPERS had a funded ratio of 93 percent, meaning it had about $93.40 in assets for every $100 promised in benefits (liabilities). The financial crisis blew holes in the state pension funds that are still visible today. As of July 2019, the NDPERS’ funded ratio was only 72 percent, with $1.2 billion in pension debt. During the same period, TFFR’s funded ratio decreased from 79 percent to 66 percent, compiling over $1.35 billion in unfunded pension liabilities.

If the current market downturn produces a -5 percent annual investment return, similar to what was experienced in 2008, the Reason Foundation conservatively projects that 2020 unfunded liabilities will rise an additional $400 million for NDPERS and an additional $300 million for TFFR.

In addition to missed investment return assumptions, the state has consistently failed to make the required contributions needed to achieve and maintain a 100 percent funded ratio.

According to financial reports, from 2003 to 2019, the state of North Dakota has missed over $539 million in actuarially determined employer contributions for NDPERS. Similarly, from 2004 to 2019, the state has missed over $117 million in actuarially determined employer contribution for TFFR. For nearly 20 years, North Dakota has failed to adequately fund its major state pension system.

The current coronavirus-sparked market downturn will undoubtedly exacerbate the problems public retirement systems face. Despite a decade-long bull run, pensions in North Dakota never fully recovered from the 2008 recession. It’s clear from the last 12 years that managers can’t invest their way out of this hole without significant changes in policy. To have any hope of recovering from the current crisis, elected leadership needs to address the problems that hindered the state’s pension recovery in the aftermath of the 2008 recession. The legislature, specifically the Employee Benefits Programs Committee, should consider implementing serious pension reforms.