Just one month after Gov. Mark Dayton signed a massive overhaul of Minnesota’s pension system into law, the prominent credit rating agency Moody’s warned that the changes are “far from a cure-all.”
Moody’s was one of several rating agencies that recently published articles saying the state’s reform, which is expected to stabilize the benefits of 511,000 retirees and public employees, is a step in the right direction. But the agencies warned more work will be needed to handle high pension burdens.
“We weren’t trying to fix it once and for all,” Minnesota Management and Budget Commissioner Myron Frans said. “We’re simply trying to manage in a responsible way, in a way we can afford and is sustainable, and I think we’ve done a good job.”
The pension compromise was one of the few major bills that Dayton and lawmakers agreed on this year, a bipartisan measure that came from years of work. Retired teachers and local government staff accepted a benefit cut, while current employees, employers and the state are chipping in more to tackle Minnesota’s $16.2 billion in unfunded pension liabilities. The legislation immediately eliminates $3.4 billion of that future debt and sets the state up to fully fund pensions in 30 years.
Credit rating agencies Moody’s, Standard & Poor’s and Fitch have all weighed in on the legislation. Pension liabilities are one of the things such agencies evaluate when they look at the state’s financial health and determine its bond rating; a higher bond rating saves the state money by allowing it to borrow at a lower interest rate.
Workers agreed to benefit reductions and legislators unanimously supported the changes because they were critical to ensure the state’s budget remains sound and the pension plans are viable, said Julie Bleyhl, legislative director for AFSCME Council 5.
“They’ve worked long and hard for that pension and they want to make sure that they have a dignified and secure retirement,” she said. “This guarantees that that retirement check will be there for their lifetime and the lifetime of many of their co-workers to come.”
A week after Dayton signed the legislation, S&P called it a positive step toward improving the state’s pension plan funding. However, the agency criticized Minnesota for having employee and employer contribution amounts remain fixed in state statute as a percentage of payroll.
“We think it likely that the legislature will need to make additional adjustments to the plans to keep from lagging behind actuarial requirements. The question is: How soon will those adjustments need to be made and will there be the political willingness to do so at that time?” S&P’s report said.
Shifting away from setting contribution rates by law could be more efficient in responding to changes, Frans said, but that needs to be balanced with lawmakers’ interest in being involved in the decisionmaking.
One of S&P’s other major critiques was that the 7.5 percent assumed rate of return on investments — which was lowered from 8 and 8.5 percent as part of the pension reform — is still too optimistic.
Minnesota pension administrators have assumed a much higher rate of return than some other states, and this year’s change brought Minnesota more in line with other places, said Brian Rice, an attorney and lobbyist who has represented various pension funds.
“Their criticisms are fair,” Rice said of the agencies’ reviews, but he likened them to doctors — they are always going to find something the state could improve.
The legislation directs the state to contribute $141 million through 2021 to stabilize pension plans. Nonetheless, Rice said Minnesota has “gotten by on the cheap” over the years, relying on benefit reductions more than increased contributions. Moody’s review noted that if the state’s large unfunded liabilities continue to grow, it is uncertain whether the state could keep leaning on benefit reductions rather than government contributions.
In June, Fitch released a report that said even with the legislated changes, pension funding improvements may not come any time soon. In an analysis that touched on several states’ pension reforms, including Minnesota’s, the agency said pension funds that have not fully recovered from the Great Recession might have to weather another economic downturn soon, and more retirees are drawing benefits as people live longer.
Longevity is one of the factors contributing to problems with the Teachers Retirement Association, one of the state’s four public employee pension funds, said Rep. Tim O’Driscoll, R-Sartell, the House author of the pension bill. Teachers live longer than people in most professions and have been getting higher benefits than other public employees, he said, resulting in “real structural issues.”
Teachers Retirement Association will see a 20 percent immediate reduction in its unfunded liability under the legislation, Moody’s estimated. But the agency said even with that change, the unfunded liability will still total about 150 percent of payroll, roughly twice what it was a decade ago.
“There’s more work to be done and we’ll see what the future holds, but it was a major accomplishment to get the bill passed,” said Jay Stoffel, Minnesota Teachers Retirement Association executive director.
State pensions, like all retirement plans, require constant monitoring and periodic adjustments, Denise Specht, president of the teachers union Education Minnesota, said in a statement. Investment return predictions over decades are just educated guesses, she said, particularly given the U.S.-China trade war.
Frans noted then-Gov. Tim Pawlenty reformed pensions in 2010, and the 2018 changes were a key piece of Dayton’s effort to leave the state financially sound. He expects the next governor will likely take on pensions, too, but might not have to make any major changes in the first four years.
“What we’ve done this year is give the next governor some breathing room,” Frans said.
Rice estimated the latest round of changes would hold for a minimum of five years.
“Then look at it carefully,” he said. “And say ‘Has it worked? Has it worked the way we intended?’ ”