Williams: COVID-19 is a serious problem for ND pensions

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Forum columnist

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 epic decline isn’t just a problem for the gilded elites. It’s a problem for our nation’s already stressed retirement systems and the millions of middle-class workers and retirees that depend on them. 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% and -0.29%, respectively, well below the 8.0% 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%, 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%, with a $1.2 billion in pension debt. During the same period, TFFR’s funded ratio decreased from 79% to 66%, compiling over $1.35 billion in unfunded pension liabilities. If the current COVID-19 market downturn produce a -5% 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% 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.


For a better understanding of How COVID-19 may impact state pensions in North Dakota Click Here to try our new COVID-19 pension forecasting tool.

Williams is a policy analyst with Reason Foundation's Pension Integrity Project. Previously, Williams worked as an economic research specialist with The Center for the Study of Public Choice and Private Enterprise at North Dakota State University. He completed his undergraduate degree in economics at Florida International University in Miami and his master’s in financial economics at the University of Detroit Mercy.

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