Government pension check: Hopefully in the mail

Will pension funds have enough money to pay off their plan’s retirees? Each pension fund has a portfolio of investments (assets) and a current value of future pension payouts (liabilities). The pension fund is considered well-funded if the assets exceed the liabilities. An easy gauge of pension health is the funded ratio, which is the assets divided by the liabilities (see table).

Most pension funds in the Ninth District are underfunded, with the Michigan Public School Pension having the lowest funded ratio at 60 percent, with unfunded liabilities of $26 billion. One way to remedy the underfunded problem is for government employers to kick in more money (via public tax dollars). The employer contribution necessary to eventually make a pension fund whole is called the annual required contribution (ARC) and is determined in part by related employee contributions and investment returns.

Employee contributions are typically a set percentage of salary or wages. Investment returns are gauged against return assumptions, which range from 7.2 percent to 8.4 percent for different plans (see table). Higher investment assumptions lead to lower employer contributions (and therefore lower ARC), at least initially. But failure to meet investment assumptions creates unfunded liabilities, which raises ARC over time; the higher the investment assumption, the greater the unfunded liabilities when returns are low.

The National Association of State Retirement Administrators (NASRA) recently released a report analyzing state public pension plans from 2001 through 2013, comparing actual government contributions to the annual required amounts. The results show a range of disparities across Ninth District states (see table). Some states have one unified system while others have separate plans for teachers or other public employees. Wisconsin’s annual contributions exceeded ARC by three percent over this 12-year period, while government contributions for the North Dakota Public Employees Retirement System were 42 percent below the ARC.

Underfunded plans are occurring despite the fact that actual government contributions have been rising steeply for many government employers. For example, school districts in the Michigan Public Schools plan have seen their actual contributions rise from about $600 million in 2001 to almost $1.4 billion in 2013, according to the NASRA report. Over this same period, the annual required amount has risen from about $600 million to almost $2 billion.

Research Analyst Dulguun Batbold contributed to this article.

State pensions -- 3-25-15

Ninth District economy grew in January and February

Oil has dominated the headlines, but the Ninth District economy continued to expand in January and February, with many indicators exhibiting strength and labor markets appearing to have tightened. Several sectors, particularly energy and other commodities, are dealing with low prices. But counteractive, positive conditions for consumers and others helped limit the negative effects. Mild winter weather has had similarly mixed effects.

A wide swath of sectors saw growth. For example, a manufacturing index increased, indicating expansion in the Dakotas and Minnesota. A manufacturer of capital equipment reported that demand in January was stronger than expected. In the services sector, a merger and acquisition services firm noted increased consulting activity and a web design and programming firm noted increased interest from newer firms. In addition, railroads plan to invest more in capital equipment in 2015, and several retailers noted sales increases.

Labor markets continued to tighten, as unemployment rates dropped in many areas of the district. Business owners in South Dakota and western Montana noted difficulty finding workers to fill open positions. A Minnesota staffing firm reported that finding workers was difficult and that competition for those workers increased recently.

As labor markets have tightened, wage pressures appear to have increased in some areas. While data suggest that overall wage increases have been moderate, there were more frequent reports of wage increases above 3 percent during the past couple of months. A recent ad hoc survey by the Minneapolis Fed also found that more employers planned to increase starting pay. Nevertheless, overall wage increases generally remained moderate. Lower energy and other commodities prices affected different regions of the Ninth District.

Lower oil prices affected producers as they cut back on new development in North Dakota and Montana by nearly 30 percent from the beginning of the year, leading to reduced hours and layoffs of oilfield workers (see chart). The number of job postings in the region has also decreased, but several companies in various sectors are still looking for employees. Wage pressures and apartment rental prices have eased somewhat in the energy-producing region.

Beige book blog 3-10-15

Among other commodities, the evidence is mixed. For example, lower metal prices caused a Montana copper-silver mine to shut down. Even though iron ore prices have been dropping, an iron ore analyst expects production to increase slightly in 2015. Low crop prices have hampered farmers, but benefited animal producers due to lower feed costs.

While some sectors have suffered from lower commodity prices, district consumers have benefited. For example, Minnesota gasoline prices in mid-February were over a dollar per gallon lower than a year ago. This may have helped boost consumer spending, as district retailers noted growth in retail sales. For example, a North Dakota mall noted that sales were up in January compared with a year ago, and a bar and restaurant chain in Minnesota reported strong sales during January compared with last year. Recent light truck and car sales were relatively solid in Montana, according to a representative of an auto dealers association.

The increasing value of the dollar has made U.S. products more expensive for foreigners. For example, the stronger U.S. dollar and Canadian exchange rate dampened demand from Canadian tourists and shoppers as border crossings and related sales decreased in district states.

The winter has been relatively warm and dry, which aided commercial construction firms that were able to build more and required less heating. Ranchers benefited from less winter stress on their animals. However, not all benefited from mild weather. Several auto body shops complained they had less demand due to better driving conditions that reduced accidents. Some apparel stores had difficulty selling winter clothing due to relatively mild weather conditions during December and January. In addition, a lack of snow slowed winter tourism activity in several areas.

Ninth District foreclosures declining, staying ahead of nation

While home sales in 2014 were not particularly strong, the housing market is showing continued strength in terms of foreclosures, which have ratcheted down from very high rates as recently as 2012, according to data from CoreLogic, a real estate and financial services analytics firm.

Over the 24-month period ending this past January, district states saw the number of completed foreclosures drop by between 34 percent (North Dakota) and 57 percent (Minnesota). This comes on top of the fact that the proportion of troubled mortgages in district states is lower than the national average.

The national rate of seriously delinquent loans currently stands at 4 percent—its lowest level since 2008, according to CoreLogic. But delinquency rates have also been falling in district states and are a fraction of the national rate, with North Dakota’s rate at just 1 percent.

Foreclosures -- 3-10-15



 

College enrollments falling in Ninth District, nationwide

Something is happening on college campuses across the country—or rather, not happening.

Despite all the messages encouraging college attendance—not to mention job and other data that demonstrate its utility—higher education enrollments have been dropping steadily in recent years, according to data from the National Student Clearinghouse Research Center.

Every state in the Ninth District has witnessed an enrollment drop at degree-granting higher education institutions for at least two consecutive years. The drop from fall 2012 to fall 2014 was highest in Montana, at almost 6 percent, while North Dakota and Minnesota were also above the national average (see chart). In fact, save for South Dakota, enrollments have declined in every other district state for at least three years running.

Some of the reason behind the drop is a cyclical economy. Joblessness, for example, tends to push people into school to obtain better skills for the job market, and enrollments swelled during the Great Recession. A stronger job market is likely pulling many students away from their books.

Demographics are also playing a key role. When national higher education enrollment peaked in 2011, people in their so-called prime college years (18 to 21 years old) were also at their peak and have since declined, leading to lower enrollments.

College enrollments -- 2-26-15

Minnesota consumers benefiting from a drop in gasoline prices

 As oil prices have plummeted, so have gasoline prices, since the price of crude oil represents more than half the cost of a gallon of gasoline (see Chart 1).

In Janaury, the price for regular Minnesota gasoline dropped below $2 per gallon, more than $1 per gallon lower than a year earlier. Through the first week of February, Minnesota gasoline prices have picked up by about 20 cents per gallon, but are still about $1 per gallon lower than last year. Gas prices haven’t been consistently below $2 per gallon (other than a six-month period during the Great Recession) since 2004 and earlier.

MN gas prices CH1

As gasoline prices drop, consumers have more disposable income to spend on goods and services other than gas. According the Bureau of Labor Statistics Consumer Expenditure Survey data, a $1 per gallon decrease in gasoline prices over a year’s time could provide consumers with an additional $400 to $1,200, depending on how much they typically spend on gasoline (see Chart 2). Consumers with lower income tend to spend less on gasoline than those with higher income.

As a share of total expenditure, consumers in the highest income quintile spend a smaller share on gasoline and motor oil than those in lower quintiles (see Chart 3).

Retail sales data are not yet showing an impact from low gasoline prices. According to U.S. retail sales data, while gasoline prices and sales at gasoline stations dropped notably in December and January, there were only mild increases in U.S. retail sales after removing sales at auto dealers and gasoline stations. Consumers could be spending their extra disposable income on items not recorded in retail sales figures, such as utility, cable or medical bills, or putting it into savings.

MN gas prices CH2-3

Ad hoc survey: Ninth District businesses plan to ramp up hiring, increase starting pay

The Ninth District economy is in growth mode and employment is expected to increase, based on a recent poll of 140 business contacts from around the district (see methodology below).

Businesses are expecting to expand, with 46 percent of respondents planning to increase employment at their firms and 58 percent of these firms citing anticipated high sales growth as the most important factor behind increased employment. Only 3 percent plan to decrease employment. In the same survey a year ago, 41 percent planned to increase employment and 9 percent planned to cut jobs (see chart).

Other important factors cited for new hiring were overworked staff, the need for additional skills and improved financial condition of firms. The vast majority of respondents plan to use current employee referrals, word of mouth and advertising to get new employees. Forty-eight percent plan to use a recruiting firm, which is up from 22 percent of respondents in last year’s poll. Twenty-seven percent of respondents also plan to raise starting pay compared with only 8 percent last year.

Feb ad hoc survey Ch1+meth -- 2-13-15

Methodology: On Dec. 1, 2014, the Minneapolis Fed emailed a web-based survey to about 600 Beige Book contacts from around the Ninth District. By Feb. 12, 140 contacts had filled out the survey. The respondents come from a variety of industries (see table).

The aches and pains of working-age disability

Since the 1980s, working-age disability has been rising, and particularly over the past decade. Many disorders can qualify a person for one of two major federal disability programs: Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI).

However, recipients are increasingly qualifying for these programs because of either mental disorders or conditions related to the musculoskeletal system or connective tissues, which covers a variety of muscle, back and joint disorders like arthritis, back pain, tendonitis and herniated discs.

In Ninth District states, the most common disability diagnosis (at 42 percent) for SSDI recipients is a mental disorder, such as anxiety, post-traumatic stress disorder, depression or bipolar disorder (see Chart 1). While recipient growth in this category exceeded 50 percent from 2003 to 2013, it has leveled off in recent years.

The fastest growing diagnosis involves conditions related to the musculoskeletal system and connective tissue. This category covered about one in four SSDI recipients in 2013; total recipients have doubled over the past decade. Growth in these two major diagnosis categories has also been faster in the Ninth District than in the nation over the past decade (see Chart 2).

For much more on disability trends in the Ninth District, see the January cover of the fedgazette.

Dulguun Batbold, research analyst, contributed data to this article.

Disability diagnosis CH1-2 -- 2-10-15


A look at rising veteran disability

The incidence of working-age, civilian disability, as measured by enrollments in the largest federal disability programs, has been rising for the better part of three decades (see discussion in the January fedgazette). But one other federal disability program has been witnessing even faster growth of late: veteran disability.

Veterans’ disability compensation, as it’s called, is paid to veterans who incur a disability during active military service or are diagnosed with a post-service disability that is presumed to be related to military service. After seeing little growth in the 1990s, the number of veterans qualifying for disability compensation rose by 62 percent from 2000 to 2013, according to the U.S. Department of Veterans Affairs (see Chart 1). During this time, the population of eligible veterans also shrank by 17 percent, according to the Congressional Budget Office.

Though historical data on veteran disability by state are not publicly available, recent data suggest that the same growth trend is occurring in Ninth District states. From 2011 to 2013, every district state saw growth of at least 7 percent in veteran disability; Minnesota’s 12 percent growth topped the national average (see Chart 2).

Veterans disability Ch1-2

Across district states, 187,000 veterans received disability benefits in 2013. That translates to a small but notable portion of the district labor force—ranging from about 2 percent (Wisconsin) to almost 4 percent (Montana), with most district states above the national average (see Chart 3).

Veterans disability Ch3

While veterans receiving disability compensation are spread throughout a given state, they tend to be more concentrated around military bases, such as Camp Ripley in central Minnesota, Ellsworth Air Force Base in Rapid City, S.D., and Malmstrom Air Force Base near Great Falls, Mont. (see map).

Dulguun Batbold, research analyst, contributed data to this article.

Veterans disability -- Map 2-4-15

 

Mixed year for district mid-cap stocks in 2014

Stocks of mid-cap companies in the Ninth District had a lackluster year in 2014, closing the year with a less than 1 percent overall gain, following a 29 percent increase in 2013. Meanwhile, the benchmark S&P MidCap 400 Index increased 8 percent in 2014. Despite the 2014 performance, the longer-run trend in the district index remains broadly consistent with that in the larger S&P MidCap 400 Index (see Chart 1).

9th Dist stock index CH1 -- 1-26-15

Performance was mixed across companies in the index with gains in half almost offset by losses in the other half. The top performer was C. H. Robinson Worldwide, a freight transportation and logistics company based in Eden Prairie, Minn., which saw its market cap increase by $2.1 billion (24 percent) in 2014. Stratasys, a manufacturer of 3D printers also based in Eden Prairie had the largest loss at $2.3 billion (36 percent) of its market value.

In terms of sector composition, Ninth District companies in the services, basic materials and consumer goods sectors posted overall gains in market value (see Chart 2). The services sector had a particularly strong year in 2014, adding $4.9 billion in market cap. Notable performers in this category include the Buffalo Wild Wings restaurant chain (24 percent increase in market value), SuperValu, a food retail company (32 percent), and Patterson Cos., a medical equipment wholesaler (14 percent). Together, these performers added $1.9 billion in market capitalization to the sector total.

9th Dist stock index CH2 -- 1-26-15

In all other sectors, district mid-cap stocks posted overall decreases in market values. After Stratasys, worst performers included MDU Resources Group, a diversified utilities company based in Bismarck, N.D., whose market capitalization decreased by $1.2 billion (21 percent); Donaldson Company, a Minneapolis-based manufacturer of filtration systems, which dropped by $1.1 billion (17 percent); and Raven Industries, a diversified machinery producer based in Sioux Falls, S.D., with a $0.5 billion (36 percent) decline in market value.

The Ninth District Mid-Cap Stock Index applies a methodology similar to the one used by the S&P Midcap 400 Index to track changes in market valuations of mid-sized publicly traded companies headquartered in the district. For more details, see the index methodology.

Beige Book recap: Modest growth in Ninth District

Over the past two months, the Ninth District economy has seen modest growth, according to the latest Beige Book information released by the Federal Reserve Bank of Minneapolis. Increased activity was noted in consumer spending, professional services, manufacturing and non-energy mining. Activity was level in tourism and mixed in commercial construction, commercial real estate and agriculture. Energy, residential real estate and residential construction were down. Labor markets continued to tighten since the previous report. While overall wage increases remained modest, there were examples of steeper increases in some regions and industries.

Consumer spending and tourism: Consumer spending increased moderately. Mall and retail representatives across district states reported solid traffic and sales. Overall tourism was about level with a year ago, according to a variety of sources. Construction and real estate: Construction activity was mixed in the district’s larger cities. In Sioux Falls, S.D., the value of November commercial permits increased from a year ago, but fell in Billings, Mont.

Residential construction: Activity was mostly lower. In the Minneapolis-St. Paul area, the value of December residential permits decreased 9 percent from a year earlier and also dropped in the Bismarck, N.D. area (November data). Residential activity was stronger in Billings and Sioux Falls, however. Home sales were generally lower from a year earlier (in November). In the Sioux Falls area, home sales were down 12 percent, inventory increased 1 percent and the median sales price increased 6 percent relative to a year earlier. Sales were also down in northwestern Wisconsin, and the median sales price was 6 percent lower. Minnesota home sales were down 13 percent, inventories of homes for sale increased 5 percent and the median sales price rose 3 percent. Home sales in the Bismarck area were about level with last year.

Manufacturing: Activity increased slightly. A manufacturing index increased in December from the previous month in Minnesota and South Dakota, but fell slightly in North Dakota. However, the index pointed to continued expansion in all three states. Through October, manufactured exports in district states were up 1 percent compared with the same period a year earlier.

Energy and mining: The energy sector slowed slightly in response to lower output prices. Oil and gas exploration activity decreased in late December compared with a month earlier in Montana and North Dakota. Mining activity increased slightly. District iron ore mines were operating at or near capacity, with November production slightly higher than a year earlier.

Agriculture: Conditions remained mixed, with livestock and dairy producers faring better than crop farmers. A Minneapolis Fed third-quarter survey found that a majority of farm incomes had fallen from a year earlier and that capital spending also decreased. The fourth quarter outlook was also weaker, according to the survey. Prices received by farmers in December decreased from a year earlier for corn, soybeans, wheat, hay and milk; prices increased for cattle, hogs, eggs and poultry.

Employment and wages: Labor markets continued to tighten since the previous report. Overall wage increases remained modest, but there were examples of steeper increases in some regions and industries. Some construction firms in the Minneapolis-St. Paul area noted that labor costs have increased recently. In addition, some managers at Minneapolis-St. Paul area restaurants indicated that they were increasing wages to attract employees.

See the full Beige Book report for more details on the national and Ninth District performance.