Minnesota retirement plans are just 75% funded

More than two years after the Legislature acted to shore up Minnesota's public pension plans, some indicators show the plans are worse off than they were before the legislation.

The plans to pay for the retirements for more than 729,000 current and retired state and local government employees are $16.7 billion short of being fully funded, a deficit that's $4 billion larger than it was in 2010.

The plans were about 80 percent funded when the reforms were passed. They're now at about 75 percent.

The numbers were released late last month by the state Legislative Commission on Pensions and Retirement, but are actually current as of June 30, 2012, when the pension plans submitted their numbers. It takes about six months to calculate the data, said Larry Martin, the commission's executive director.

Because the data show investments from the second half of 2011 to the first half of 2012, key lawmakers and state leaders say the reforms need more time to show improvement, and if action hadn't been taken the situation would be far worse.

"I know the people that run the funds; they're looking at them and keeping an eye on them," said state Rep. Michael Nelson, DFL-Brooklyn Park, who chairs the House Government Operations Committee, which heard testimony on Jan. 15 about the status of the plans. "I'm not that concerned, because I think the things we did in 2010 and moving forward are moving them in the right direction."

Others say the state needs to do more if it wants to avoid a pension crisis.

Off-the-mark investment assumptions, combined with far-too-low contributions and stock market crashes in 2001 and 2008, caused the pension deficit to swell to $12.7 billion by 2010. That year, the Legislature required state employees and employers to pay more into the funds, as well as reduced annual cost-of-living increases. Legislation passed in 2012 dropped the yearly earnings for investment expectation from 8.5 percent to 8 percent and changed some of the assumptions as to how long workers will live.

Those changes, said Martin, have also been a significant factor in why the unfunded liability has increased. The longer people are expected to live, the more will have to be paid out in retirements.

And the decrease in the earnings expectation to 8 percent also meant the plans had to save more, Martin said.

However, some in the state believe lawmakers should do more to shore up the pensions. Beth Kadoun, the director of tax and fiscal policy for the Minnesota Chamber of Commerce, said employees should be required to pay even more into the plans in order to get the unfunded liability at least over 80 percent.

"There's debate on what's considered a fully funded plan. Some look at an 80 percent marker, others would argue it needs to really be at 100 percent," she said. "Even if you go with that lower marker of 80 percent, we're still below that."

Nationwide, Minnesota ranks somewhere in the middle compared to other states in pension funding, according to the Pew Center on the States. A June 2012 Pew report lumped Minnesota in with six other states in the "needs improvement" category for pension health. Eleven states were rated as solid performers, with 32 ranked as "serious concerns."

Martin said if investment markets start improving, so too will the health of the state's pension plans.

That didn't happen in 2011. A Minnesota state auditor's report published earlier this month found that none of the state's major large pension funds met their investment performance benchmarks that year. The State Board of Investment, which holds $45 billion in assets, saw only a 1.5 percent rate of return. The S&P 500 Index, the auditor's reported noted, returned 2.1 percent.

But the markets improved significantly in the second half of 2012. The Duluth Teachers Retirement Fund Association, for example, which has just over 3,300 members, saw a negative return in 2011, but then saw a percentage return in the mid-teens in 2012, said Association Executive Director Jay Stoffel.

Still, the Duluth Teachers Fund has a long way to go before it's healthy, Stoffel said. It has a $119 million unfunded liability, is only 63 percent funded, and has more retirees to pay than active teachers paying into the fund.

In addition to raising teacher contributions, cutting benefits and eliminating cost-of-living adjustments, Stoffel said the Duluth Teachers Fund will go to the state Legislature and ask for about $5 million to $10 million a year in state assistance until the fund is in better shape. Several years of double-digit investment returns, he said, would do just that.

"We are in a situation we don't like. We've never been in this position before," he said.