Minnesota is discovering the downside of having the second-highest life expectancy rate in the nation.

Pension fund managers are trying to offset more than $1 billion in additional future liabilities after learning that the state's employees, teachers and retirees who receive the benefit are living an average two years longer.

"It's good news for retirees that they're living longer," said David Bergstrom, executive director of the Minnesota State Retirement System. "From a pension standpoint, it's bad news."

The move comes as Minnesota and other states have scrutinized the sometimes rosy assumptions underlying how much money they will need to fund billions in retiree benefits. The Minnesota Legislature already lowered the expected rate of return for some state pension funds' investments from 8.5 to 8 percent last year, a move that the Teachers Retirement Association hopes to follow.

Minnesotans live an average of 81.1 years, which is longer than anywhere in the continental U.S. (Hawaii has the highest life expectancy rate of any state). Those rates are even higher for the teachers' pension system, where a 65-year-old female member is expected to live to 90.

The state's pension funds — on which more than a half-million people depend to fund their retirements — are still using mortality projections from 2000. Actuaries recommended making changes in studies for the pension funds last year.

State Rep. Tim O'Driscoll, R-Sartell, said that Minnesota's pension funds are still healthy compared with other states. He chairs the Legislative Commission on Pensions and Retirement, which heard testimony on proposals from pension fund leaders last week. The 14-member bipartisan panel has yet to decide whether to include the recommendations in a bill for approval by the full Legislature during session, which convenes in March.

Pension system managers are looking at an array of ideas to deal with the projected shortfall, mostly some combination of cutting cost-of-living adjustments and raising contributions from employers or employees.

The Teachers Retirement Association faces the steepest challenges. It's looking to offset $600 million in additional projected liabilities from expanding mortality rates and $800 million from shrinking its estimated investment returns, said deputy executive director J. Michael Stoffel.

Cutting cost-of-living increases in half and increasing school districts' pension contributions by a percentage point "aren't easy conversations … but it's an important thing that we need to take on as stewards of the fund," Stoffel said. "We've got to make sure the core benefits are protected."

Teachers will be spared any contribution increases under the plan. Stoffel noted that teachers chip in 7.5 percent of their pay, the same as school districts, while employers tend to contribute much more than employees in public pension plans nationally.

"Mortality rates are only expected to improve, so longevity is a reality that must be faced," the association wrote in a memo to the pensions commission.

Several major unions representing teachers and state employees praised the proposals, saying participants were taking steps to keep the pension funds sound.

"We want to make sure that the pension fund is there for teachers," said Rodney Rowe, secretary-treasurer of Education Minnesota.

The Public Employees Retirement Association will hold off on making immediate changes, saying its fund is healthy.

The St. Paul teachers' pension fund also is trying to cover an extra $52 million projected shortfall from changing assumptions about life expectancy. It represents one of the largest and most diverse school districts in Minnesota. Executive Director Jill Schurtz said preserving the security of retirees puts less of a strain on the social support network later.

And as the population works longer now, she said, teachers will contribute to the pension system for more years, a growing trend that hasn't been fully revealed yet in actuarial projections.

"As people work longer, it may ultimately balance itself out," she said.

Schurtz noted the challenges that came with women making up nearly three-quarters of the district's teachers. Women, on average, live longer than men.

"It will not surprise you to find me recruiting male teachers at this meeting," Schurtz joked during her testimony to the commission. "So any able-bodied male person in the room, we invite you to join our ranks to help our mortality."

Maya Rao • 651-925-5043