The 'Haves'.

And the 'have nots'.

---

---

A few years ago, as we were getting into the car to drive to a dinner party, my wife said to me: “whatever you do, don’t talk about unfunded liabilities. It’s a room-emptier. No one wants to hear about it.”

Thank God for News Items and Political News Items. Here we can talk about the unfunded liabilities of public pensions and retiree health benefits until the cows come home.

No reporter covers this story better than Mary Williams Walsh. She covered it at The Wall Street Journal. She covered it at The New York Times. She covers it for News Items. What follows is a lengthy report on the Minnesota State Board of Investment, a four-member body charged with the stewardship of $146 billion of public money. Its ex officio chairman is Governor Tim Walz.

---

---

When Tim Walz was named Kamala Harris’s running mate, he disclosed his personal finances and showed that he and his wife, Gwen, own virtually no stocks. That sets Walz apart from the 62 percent of U.S. adults — 162 million people — who do own stocks, at least indirectly through retirement plans. The Wall Street Journal did some man-on-the-street reporting and found that some Americans liked the idea of a vice president who wasn’t wedded to Wall Street. “He’s just a regular-degular person,” one said approvingly.

But Walz is, in fact, tied in with Wall Street. As the governor of Minnesota, he’s the ex officio chairman of the Minnesota State Board of Investment, a four-member body charged with the stewardship of $146 billion of public money. Some is to pay for state programs, but most, about $94 billion, is earmarked for the pensions of public workers all over the state. That includes 155,840 current and retired teachers, one of whom is, of course, Governor Walz. 

You can’t oversee $146 billion of public money without drawing some fire. Walz was recently accused of “cooking the books,” by an outside investigator who said he and the other board members were concealing hundreds of millions of dollars in fees paid to the Wall Street firms that invest the money. In a report issued yesterday the investigator, Edward Siedle, also said that the board has been misstating its investment performance for at least the past ten years.

Walz hasn’t responded to the accusations, which have been largely drowned out in the tumult of the presidential campaign, but they won’t go away. The trouble is, Walz has lost the trust of thousands of Minnesota teachers whose pension money he’s responsible for. They’ve been arguing for years that something’s wrong with their pension plan. No one in Minnesota officialdom would take them seriously, they say, so they chipped in the money to hire Siedle. That was last spring, months before Governor Walz stepped onto the national stage. The teachers aren’t about to back off now, just because Walz is busy helping Kamala Harris duke it out with Donald Trump and JD Vance for the White House.

Their beef isn’t partisan. The problem is that the Minnesota teachers’ pension plan is a two-tiered system, which has created “have” and “have-not” teachers. The teachers in Tier 1, who were hired before 1989, get a sweet deal in retirement — very sweet, if they were already retired in the late 1990s. Teachers in Tier 2, hired after 1989, pay hefty contributions into the pension system, but they’ll never get pensions as good as the ones Tier 1 gets. Since most Tier 1 members have by now retired, they don’t make pension contributions. (Walz, if you were wondering, is in Tier 2.)

The State Board of Investment co-mingles all of the money. That means that for years, the Tier 2 teachers’ contributions have been subsidizing Tier 1’s ample payouts. Little is left, they fear, to fund the skimpier payouts they’ll get when they retire. It’s arbitrary, it’s unfair, and it rankles. 

“We were told this would be fixed by the time we were eligible for retirement, and it was never fixed,” said Maggie Temple, a Tier 2 member who has been teaching high school social studies in Minneapolis for 30 years. 

In his report, issued yesterday, Siedle pointed out that at last count, the teachers’ pension fund had just 76 cents for every dollar promised to the teachers. When a company pension fund falls that far short, federal law requires it to adopt a credible rehabilitation plan. But states aren’t bound by the federal pension law, so in Minnesota, the State Board of Investment has been using “alternative investments,” in place of a rehab plan. The hope is that alternatives, such as private equity, will generate big enough returns to close the funding gap. 

“Private market investments have an illiquidity premium that the SBI can capture,” the State Board of Investment says in “Investment Beliefs,” its statement of principles.

The average large U.S. public pension plan has 14 percent of its money in private equity; Minnesota has 25 percent. 

Temple doesn’t think the investment strategy is working. If it were, she said in a phone interview, the funded ratio of the teachers’ plan would be rising, but it isn’t. Ten years ago, the teachers’ plan was 74 percent funded. Now, after taking in billions in teachers’ contributions, shifting more money into alternatives, and collecting ten more years of investment income, it’s still only 76 percent funded. 

The funded ratio matters, Temple said, because when Tier 2 teachers ask why they can’t have larger pensions, like Tier 1’s, the answer is always, “because there’s 24 percent underfunding.” 

If you’ve been reading News Items on public pensions, you may recall that the states have refused for 50 years to be bound by the federal law that governs company pension funding. Nor do the states adhere to FASB’s pension-accounting standards. They have their own accounting standards, which allow them to understate their pension obligations, by using their actuaries’ investment-return assumption as a discount rate. The riskier the investments, the higher the assumed returns, and the more plausible the plan looks on paper. This approach ignores risk and contributes to underfunding. It has been a source of bitter contention for decades. 

Knowing this, we think the Minnesota teachers’ pension plan isn’t just 24 percent underfunded. We think it’s worse. The state over-promised to Tier 1 and, rather than owning up to its mistake, is now exploiting Tier 2 to cover the shortfall, apparently hoping in vain that no one will figure it out. 

Temple started thinking hard about pensions a couple years ago, when a Tier 1 teacher friend of hers retired early, on a full, unreduced pension. 

“She’s traveling through Italy in the winter, and I’m slogging through the snow at 6 a.m. just to get to class,” she said. Tier 2 members have to work until they’re 66 to get their full pensions. If they do retire early, their monthly payments are reduced for the rest of their lives. And the reductions are steep. 

But it gets worse. Years ago, Minnesota ran two separate pension funds, one for active teachers and the other, called the Postretirement Fund, for retired teachers. Back in the 1990s, when virtually all retirees were from Tier 1, Minnesota lawmakers granted them inexplicably large cost-of-living adjustments for six years running — 10.1 percent in 1998, when inflation was just 1.6 percent; 9.8 percent in 1999, when inflation was 2.2 percent; 11.1 percent in 2000 when inflation was 3.4 percent; and so on. 

The big increases compounded, so the Tier 1 teachers who could retire in time to get them ended up with super-sized pensions for the rest of their lives. Their pensions were big even compared to those of younger Tier 1 teachers — forget about Tier 2. 

This is the kind of costly blunder you can make when you don’t calculate your pension obligations correctly. (Minnesota’s Legislative Commission on Pensions had a rule at the time requiring the Postretirement Fund’s obligations to be set equal to its assets.) (Yes, you read that right.) There was no mechanism for shoring up the Postretirement Fund. It bled cash for years and finally, in 2009, was merged into the other teachers’ pension fund — the one for active teachers, like Maggie Temple. 

To put it simply, the state made its younger teachers bail out their elders. 

Temple can see the broad brushstrokes of what happened, but she doesn’t have the specifics. The State Board of Investment doesn’t reveal how many teachers are in each tier, or how much each tier pays in versus how much each tier receives. Temple and some of the other Tier 2 teachers believe they have a right to know. They formed a Facebook group, Minnesota Educators for Pension Reform, to share information and call attention to their predicament. The group quickly swelled to more than 20,000 members.

They first sought help from their union. That went nowhere. The union tried to take over their Facebook group and blocked teachers who asked unwelcome questions. Next the group turned to the Teachers Retirement Association, the state body that administers their pension plan. But they sensed that the Association was carrying water for Tier 1. 

They met with the State Board of Investment, and  asked for data that would show what was hollowing out their pension plan. 

“They said, ‘Oh, it’s very complicated, and besides, it doesn’t really tell you anything,’” Temple said. 

That’s when the group started a GoFundMe campaign to hire Siedle, a Florida lawyer who has made a career of investigating public pension funds. 

“We raised the money in 19 days, which shows you how absolutely pissed off teachers are,” said Temple.

When Siedle reviews a pension fund, he focuses on investment practices, looking for things like conflicts of interest, overstated investment returns, and excessive fees. He told the teachers he couldn’t do actuarial work, like figuring out how much Tier 2 was subsidizing Tier 1, but he still thought he could help them better understand their plan’s chronic weakness. 

He started by requesting six years’ worth of data: investment consultants’ contracts, offering memoranda, performance reports, investment fees, placement-agent fees, and more. The Teachers Retirement Association told him it didn’t have any such data. The State Board of Investment refused to engage with him at all. 

While waiting for data that never came, Siedle looked at ten years’ worth of annual reports, which he could get on line. He found two big problems. First, the State Board of Investment was reporting investment returns that appeared “highly suspect.” The board compared its returns to a custom benchmark, without making clear what the benchmark consisted of. Year after year, for ten years, it claimed that its returns beat the benchmark by 0.2 percent. It didn’t matter what the timeframe was: one year, five years, 10 years, 20 years or 30 years. The board always claimed it had a 0.2 percent edge.

“This seems virtually impossible,” he said. One possible explanation: The board was changing its benchmark every year. 

“The whole point is to create a benchmark that you can beat,” he said. 

The second problem: Siedle said the Board of investment was “massively” understating the fees it paid to the firms that invested its money under contract. 

As it shifted more money into alternatives, the Board of Investment gave its business to the pricier firms. Using industry data, Siedle estimated that a pension fund the size of the Minnesota teachers’ plan, with one-fourth of its investments in private equity, would likely have paid fees of $334 million to $467 million in 2023. Instead, the annual report cited fees of $24 million that year, or less than one-tenth of what Siedle would have considered credible. 

“I will wager up to a million dollars of my own money, those fees are dead wrong,” he said. 

He also pointed to an unusual paragraph in the Board’s annual reports, saying that all investment returns were reported after transaction costs and fees had been deducted, “to assure that the Board’s focus is on true net returns.” Siedle said he took this to mean the Board’s staff had withheld the fee information from Walz and the other three board members, making it impossible for them to do their fiduciary duty of guarding against excessive fees. 

“The only reason to report total returns on a net-of-fees basis is to conceal the total fee amounts,” he said. 

He tried to present his preliminary findings to the Minnesota attorney general, but was rebuffed. The attorney general is, like Gov. Walz, an ex officio member of the State Board of Investment. (The other two board members are the state auditor and the secretary of state.) With no state officials to report his findings to, Siedle sent them to the Securities and Exchange Commission and the FBI. 

He’s now calling for an exhaustive investigation of all the Board’s past payments to its investment firms, so that “any illegitimate or excessive payments” can be clawed back. That raises the possibility that the shift to alternative investments, meant to bolster the pension fund, is actually undercutting the pension fund — they’re supposed to have higher returns, but how much of that is offset by the higher fees? 

The teachers want to know, but they think they’ll have to sue to get the data. “It’s maddening, because it’s our money,” Temple said. 

While the teachers mull their next steps, hundreds of millions of dollars are leaving their pension fund — payments to the investment firms, and payments to the Tier 1 retirees, particularly those lucky enough to have retired in the 1990s. 

In a way, it’s like Social Security. Workers across the United States pay 6.2 percent of each paycheck to the program; their employers match it. At the same time, retirees are collecting the benefits they’re entitled to. Each year, the payroll-tax revenues fall short of the benefit payments. The program is draining away the reserves it accumulated in its so-called trust fund. We all know there’s going to be a crack-up in less than a decade if nothing is done — and so far, nothing is being done. 

The last attempt to fix Social Security was in 2004, when George W. Bush was president. He proposed to let workers put some of their payroll taxes into individual retirement accounts, invested in a broad stock index. That initiative went down in flames. Five years earlier, President Bill Clinton had called for investing about 15 percent of the Social Security trust fund in stocks. That didn’t go anywhere either. Since then, nada. No one wants to cross the current retirees, even if it means penalizing future generations. When Joe Biden was running against Donald Trump, they agreed to keep Social Security “off the table.” 

If Kamala Harris is elected president in November, Tim Walz will go to Washington and the Minnesota teachers’ pensions won’t be his problem any more. Social Security will be.