Office of the Legislative Auditor State of Minnesota

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Office of the Legislative AuditorState of
Minnesota

• Postemployment Benefits for Public Employees

August 20, 2007
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Pension Plan Deficits and Benefit Formula
Problems

• Postretirement Funds 4 billion deficit as of
  July 2006
• Benefit formula does not protect the fund
• Benefit formula does not align benefit increases
  with inflation

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Funding Ratios Do Not Reflect the Postretirement
Funds Deficit

• Funding ratios make pension plans appear better
  funded than they really are
• Funding ratios improperly value the
  Postretirement Funds assets
• Assets should be on the basis of a market-related
  value
• 2007 law now requires Pension Commissions
  actuarial standards to be consistent with
  accounting principles

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Reported Status of Statewide Pension Plans as of
July 1, 2006
Deficit(millions) Funding Ratio Target Date
PERAPublic Employees Retirement Plan 4,243 75 2031
TRA 1,643 92 2037
MSRS General Plan 332 96 2020
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Difference in Funding Ratios That Reflect
Postretirement Funds Deficit, July 1, 2006
Original Funding Ratio Revised Funding Ratio
PERAPublic Employees Retirement Plan 75 68
TRA 92 82
MSRS General Plan 96 90
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Effects of Prior Legislative Changes

• Recent legislative changes
• Cap of 5 percent on benefit increases
• Contributions increased
• These changes will not affect the Postretirement
  Funds deficit

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Problems With Formula to Increase Benefits

• Helped cause deficits
• Unaligned with inflation

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Problems With Formula to Increase Benefits

• Helped cause deficits
• Unaligned with inflation
• Inequities between cohorts of retirees
• Retirees received 9.2 percent average annual
  increases from 1996 to 2001
• Retirees after July 1, 2001 received increases of
  2.5 percent or less

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Recommendations

• Appropriate disclosure for deficit (provision was
  passed by 2007 Legislature)
• Fully fund the Postretirement Fund
• Change formula for benefit increases (state
  retirement systems joint Post Fund committee)

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Local Teachers Retirement Funds

• St. Paul Teachers Retirement Fund is at risk for
  serious funding problems
• 420 million deficit and 69 funding ratio as of
  July 2006
• Inadequate contributions, stock market declines,
  and postretirement benefit increases

• Disallow investment-based benefit increases when
  funds have large deficits
• Consider formulas based on inflation consider
  increasing contributions
• 2007 law changes

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Summary of Findings

• Statewide pension plans appear better funded than
  they really are
• Recent changes will not solve the deficit
• The St. Paul Teachers Retirement Fund at risk of
  serious funding problems

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Summary of Recommendations

• The Legislature should

• Require pension plans to reflect status of
  Postretirement Fund (2007 law)
• Fully fund Postretirement Fund and change
  postretirement benefit formula (Joint Post Fund
  Committee)
• Change postretirement benefit formula for the
  local teachers retirement funds

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Postemployment Benefits for Public Employees is
available via the World Wide Web
at www.auditor.leg.state.mn.us/ped/2007/postemp
loyment.htm