Like millions of private retirement accounts, pension investments for hundreds of thousands of Minnesota teachers and other government workers have taken a hit from the stock market's slump. The huge funds have declined by about $14 billion, and a long recession could force hard choices -- governments and workers may have to pay more into the funds or benefits for future retirees may have to be cut.

Pension fund assets fell about 22 percent from mid-2007 through October of this year as the stock market plunged, mainly because of investment losses.

State pension funds have weathered other sharp market downturns over the years and rebounded when the economy revived. But predictions that the current downturn could be deeper and longer than others have prompted talk of seeking additional government funding to meet future obligations. The cost would fall on state and local taxpayers.

"We may have to consider a contribution rate increase," said Laurie Fiori Hacking, executive director of the Teachers Retirement Association (TRA). "We have started to talk to lawmakers about it and explain our funding situation."

Neither the teachers fund nor funds for state or local government workers plan to seek higher contributions during the upcoming legislative session, when lawmakers will be focusing on a projected $4.8 billion state budget deficit for the next two years.

The Minnesota State Retirement System (MSRS), which covers state employees, had plenty of reserves before the market plunge, and contribution increases approved in 2006 have yet to be fully felt.

"If [the market] stays down for a prolonged period, we would have to look at [more] contribution increases or maybe adjusting benefit levels for new hires," said Dave Bergstrom, executive director of the system.

'Wait until things settle down'

The Public Employees Retirement Association, whose members include police officers and firefighters, "won't even begin to look at what we need to do down the road until probably about this time next year," PERA executive director Mary Vanek said. "We need to wait until things settle down a little bit and then decide: Are we going to crawl out of it with a little tweaking or are we going to need something more significant?"

Governments and about 508,000 employees share the cost of contributions to the pension funds. The state's most recent annual contribution for most of its employees totaled $117 million, and school districts and local governments also contribute to the funds for their workers.

The full damage to the pension funds hasn't been publicly reported because its most recent report reflected returns through June 30, before the sharpest slide in the market.

A report by the State Board of Investment (SBI) shows that fund assets fell about $4 billion in the 12 months ending June 30. Since then, the board says, there has been an additional $6 billion drop during July, August and September of this year and about a $4 billion loss in October. The decline in fund balances also reflects payout to retirees.

Another drop seems likely from November, when the S&P 500, for example, dropped by more than 9 percent.

The downturn is a little worse than one in 1987 and about the same as what occurred in the 1970s, said Howard Bicker, executive director of Board of Investment. "Is it something that causes us immediate panic?" he said. "No. We're long term."

In the past, robust markets in some years have more than offset SBI's losses in others. Its combined funds for active and retired employees rose at an annual rate of 9.7 percent over the past 20 years, exceeding inflation by an average of 6.6 percentage points a year. The funds are expected to exceed inflation by 3 to 5 percentage points annually.

"The state isn't in a position where it can't pay its pension obligations," Bicker said.

He noted that market upswings tend to precede overall economic recovery and that the SBI has no plans to shift substantial assets from stocks to more conservative investments.

"Over the years we've done OK because ... we've kind of maintained our same exposure," he said, adding that the SBI even bought $2.6 billion in equities a few weeks ago.

Still, the SBI during the past year performed worse than an index of similar stocks and bonds.

Ways to save money

Over the years, the pension funds have trimmed benefits for new employees by raising their retirement age and using other strategies, but such approaches don't bring quick results, Hacking said.

She also said reducing cost-of-living adjustments might face a court challenge. She said TRA is talking to lawmakers to lay the groundwork for a possible contribution increase a couple of years from now.

Bergstrom of MSRS said it's unlikely that his fund would seek a higher government contribution before 2010, when it will be able to assess the full impact of its 2006 contribution increase. Besides, the next year or two could be a hard time for any pension fund to sell an increase to a Legislature dealing with the budget crisis.

"The immediate needs of the state and other governmental entities are much more dramatic than our immediate needs because of our long-term funding horizon," he said. "We have some time to let markets recover. They always have."

Pat Doyle • 651-222-1210