Pension Sustainability: Minnesota

Analysis of Minnesota's policies

As of July 1, 2010, the most recent date for which an actuarial valuation is available, Minnesota's pension system for teachers is 78.5 percent funded and has an amortization period over 26 years. This means that if the plan earns its assumed rate of return and maintains current contribution rates, it would take the state over 26 years to pay off its unfunded liabilities. Neither Minnesota's funding ratio nor its amortization period meets conventional standards, and the state's system is not financially sustainable according to actuarial benchmarks.

Minnesota does not currently commit excessive resources toward its teachers' retirement system. The mandatory employee contribution rate to the defined benefit plan is 6 percent, and the current employer contribution rate is 6.18 percent for local districts. These rates are reasonable, even with teachers' and local districts' additional 6.2 percent contribution to Social Security. These rates are set to increase by 0.5 percent each year for both employers and employees until reaching 7.5 percent in 2014. These future increases are not unreasonable; however, they set Minnesota's contribution rates very close to what is considered excessive. There is also an additional 0.71 percent contribution each from school district number 1, the city of Minneapolis and the state. State statute requires that unfunded liabilities must be paid off by June 30, 2037, but these rates do not meet the annual required contributions to meet that amortization period. The combined annual required contribution to meet this amortization period is 15.71 percent.

Citation

Teachers' Retirement Association Fund, Actuarial Valuation Report as of July 1, 2010 http://www.commissions.leg.state.mn.us/lcpr/documents/valuations/2010/2010valuation.tra.pdf

Recommendations for Minnesota

Ensure that the pension system is financially sustainable.
The state would be better off if its system had an amortization period of 30 years or less and a system that was more that 95 percent funded to allow protection during financial downturns. However, Minnesota should consider ways to improve its funding level without raising the contributions of districts and teachers above excessive levels. Improving funding levels necessitates, in part, systemic changes in the state's pension system. Goals 4-G and 4-I provide suggestions for pension system structures that are both sustainable and fair.

State response to our analysis

Minnesota stated that Minnesota Statutes Section 356.215, subd. 11(f) specifies a TRA amortization date of June 30, 2037, which is 26 years. This is the target date for achieving full funding. Due to the 2008-2009 market downturn, TRA had a sizable contribution deficiency. As a result of the downturn, the 2010 legislature approved a significant reform package that gradually increases both employee and employer contribution rates over the next four years and also reduces benefit liabilities by $1.75 billion. These benefit reductions come mainly from a two-year suspension in annual increases for retirees and a lower COLA of 2 percent (down from 2.5 percent under prior law). As a result of these contribution increases and benefit reductions, TRA expects its fiscal 2011 actuarial valuation to show a marked improvement in its financial status.

Last word

This analysis is based on the most recent actuarial valuation publicly available. According to the July 1, 2010, valuation, Minnesota is not meeting the actuarially required contributions to its pension system. Recent legislation may have adjusted the accrued liabilities and increased contributions rates, and this may be reflected in the 2011 valuation. If these changes result in a more positive valuation this year, then the state is commended for taking steps to bring its system back to its targeted amortization period.