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Office of the Legislative AuditorOffice of the Legislative AuditorState of MinnesotaState of Minnesota

Office of the Legislative AuditorOffice of the Legislative AuditorState of MinnesotaState of Minnesota

Postemployment Benefits for Postemployment Benefits for Public EmployeesPublic EmployeesPostemployment Benefits for Postemployment Benefits for Public EmployeesPublic Employees

August 20, 2007August 20, 2007

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Pension Plan Deficits and Benefit Pension Plan Deficits and Benefit Formula ProblemsFormula Problems Pension Plan Deficits and Benefit Pension Plan Deficits and Benefit Formula ProblemsFormula Problems

• Postretirement Fund’s $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 make pension plans appear better funded than they really are

• Funding ratios improperly value the Postretirement Fund’s assets

• Assets should be on the basis of a market-related value

• 2007 law now requires Pension Commission’s actuarial standards to be consistent with accounting principles

Funding Ratios Do Not Reflect the Funding Ratios Do Not Reflect the Postretirement Fund’s DeficitPostretirement Fund’s DeficitFunding Ratios Do Not Reflect the Funding Ratios Do Not Reflect the Postretirement Fund’s DeficitPostretirement Fund’s Deficit

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Reported Status of Statewide Pension Reported Status of Statewide Pension Plans as of July 1, 2006Plans as of July 1, 2006Reported Status of Statewide Pension Reported Status of Statewide Pension Plans as of July 1, 2006Plans 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 Difference in Funding Ratios That Reflect Postretirement Fund’s Deficit, July 1, 2006Postretirement Fund’s Deficit, July 1, 2006Difference in Funding Ratios That Reflect Difference in Funding Ratios That Reflect Postretirement Fund’s Deficit, July 1, 2006Postretirement Fund’s 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 ChangesEffects of Prior Legislative ChangesEffects of Prior Legislative ChangesEffects of Prior Legislative Changes

• Recent legislative changes

– Cap of 5 percent on benefit increases

– Contributions increased

• These changes will not affect the Postretirement Fund’s deficit

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Problems With Formula to Increase BenefitsProblems With Formula to Increase BenefitsProblems With Formula to Increase BenefitsProblems With Formula to Increase Benefits

• Helped cause deficits

• Unaligned with inflation

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1985 19901980 1995 2000 2005

Benefit IncreasesInflation

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Problems With Formula to Increase BenefitsProblems With Formula to Increase BenefitsProblems With Formula to Increase BenefitsProblems 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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RecommendationsRecommendationsRecommendationsRecommendations

• 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 FundsLocal Teachers’ Retirement FundsLocal Teachers’ Retirement FundsLocal 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 FindingsSummary of FindingsSummary of FindingsSummary 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 RecommendationsSummary of RecommendationsSummary of RecommendationsSummary of Recommendations

–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

•The Legislature should:

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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/postemployment.htm