Speed Gibson

The Minneapolis Star Tribune reports today that the Minneapolis teachers' pension fund is in trouble, only 51% funded. There's a lot of interesting information in this article.

• There are four such teachers' pension plans: Minneapolis (51% funded), St. Paul (72% funded), Duluth (92% funded), and the statewide plan (100% funded) that covers the rest.
  
• The Minneapolis plan's best such result was 67% in 1999.
  
• The Minneapolis plan was short by $851 million as of June 30, 2004, a record increase of $126 million from the prior year. This means the fund will default in about 15 years.
  
• Due to declining enrollment, the number of active teachers paying in fell 7% to about 5,000. But the number of pensioners grew by 3%.
  
• Teachers pay about 6% of their income into the fund, matched by 17% from the state, city, and school district.
  



The Senate, led by Larry Pogemiller (D-Minneapolis), want to merge this program into the state plan, selling pension bonds to make up the difference. Presumably, the state would be paying off these bonds. But the House, led by Jim Knoblach (R-St.Cloud) prefers to just tinker for now.

Yes, something has to be done. Promises were made that must be kept, as with Social Security. But also like Social Security, it's time to consider a far better option for new and younger teachers: a 401K plan.

Pensions are an anachronism. Most of the private sector is now using the newer "defined contribution" (e.g., 401K) model, and few employees want to go back. You own your 401k. You control its portfolio, and its entirely in your name, not your employer's, not some pension agency.

Forbes Magazine many years ago published a study of private pension funds, titled "Too Many Monkeys, Not Enough Bananas". As one would expect, the "amateur" investment decisions of the funds' trustees consistently and significantly underperformed "professionally managed" mutual funds. Not only did the pension plans make less investment income (bananas), they had higher trustee expenses (monkeys). In some cases, the monkeys were clearly helping themselves to some of the bananas.

The House and Senate should get together to end the Minneapolis plan. Current retirees should be merged into the state plan as Sen. Pogemiller suggests, possibly with some of the changes Rep. Knoblach suggests.

But the legislature should also establish a 401K system for all new public employees, phasing out the old plans, and giving younger workers an option to switch. By bringing the matching contributions (today an astounding 17%) into line with the private sector, we can cut some excess spending long term.

One final point: If you consult the Minneapolis Public School's web site and do the math of dividing enrollment by class size, you'll get less than 1,700 classroom teachers. But there are reportedly 5,000 active "teachers" in this plan. Just who are these additional 3,400 people?