Report Finds Minnesota Public Pensions Underfunded by Nearly $10 billion

May 4, 2006 ( - In order to pull Minnesota public pension funds out of an almost $10 billion shortfall, the state government needs to limit the benefits paid to retirees, according to a recent report.

The report by the Center for Public Finance Research focused on the state’s six largest public pension plans, which have reported underfunded pension liabilities of $6.1 billion as of June 2005.

Two of the plans, the Minnesota State Retirement System General Plan (MSRS) and the Teachers Retirement Association (TRA) are both above 95% funded, but the Public Employees Retirement Association General Plan (PERA) and St. Paul Teachers have less than 80% of the assets needed to pay the benefits owed to both active and retired plan members, the Minneapolis Star-Tribune reported. Minneapolis Teachers Retirement Fund had less than half of the assets it needed.

The report found that five of the six plans are not bringing in enough contributions to close the gap at all, with PERA alone adding $500 million in underfunded liabilities to the shortfalls in the past four years. Last year Minnesota legislators made an effort to ease the deficit of the fund by passing legislation that would increase employer contributions by 7% (See MN Passes Pension Bill to Get Fund Back in Line ).

The authors of the study recommend axing the investment bonus system for teachers’ pensions in Minneapolis, St. Paul and Duluth, and for other teachers and state, city and county employees, which will likely bring the most opposition among the recommendations, according to the Star Tribune.

The authors of the study say that the system has increased the liabilities for the plans and taxpayer risk, and that using investment gains to give permanent benefit increases is “bad public policy.”

According to the report, “every ‘investment performance bonus’ is permanently built into a retiree’s benefit base and creates obligations for the life of the recipient or the recipient’s spouse, and can only be paid for by significant investment returns on the retiree’s assets that are transferred into the fund.” The transfer of these assets into this post-retirement fund only increases the likelihood of needed additional contribution from taxpayers and employees.

Two Retiree Classes

For some of those funds, the change would immediately create two classes of retirees: those who will keep pensions previously boosted by favorable-market bonuses, and those who will receive more modest yearly cost-of-living adjustments.

An official of the bipartisan Legislative Commission on Pensions and Retirement said the report provides an accurate but narrow view of investment performance that focuses on a recent market downturn and ignores longer trends hinting at a healthier future for some funds, according to the Star Tribune. Even if the legislature backs the recommendation, bonuses will not be paid anytime soon to future or current retirees in some of the funds with steep shortfalls.

According to the news report, current rules make it mandatory for pension funds for state, city and county workers to earn years of high returns and be fully-funded before they would benefit from gains from a bull-market. PERA can only cover 75% of its funds, and the Minneapolis fund is about $1 billion underfunded.

But the association’s recommendation, if adopted, would have an immediate effect on the St. Paul and Duluth teachers pension funds, which can award bonuses without regard to funding status, according to the Star Tribune.