Pension Sustainability: Minnesota

2011 Retaining Effective Teachers Policy

Goal

The state should ensure that excessive resources are not committed to funding teachers' pension systems.

Meets a small part
Suggested Citation:
National Council on Teacher Quality. (2011). Pension Sustainability: Minnesota results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/MN-Pension-Sustainability-9

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

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.

How we graded

Many states' pension systems are based on promises they cannot afford to keep.

Teacher salaries are just one part of the compensation package that teachers receive. Virtually all teachers are also entitled to a pension, which, upon vesting, provides compensation for the rest of their lives after retirement. In an era when retirement benefits have been shrinking across industries and professions, teachers' generous pensions remain fixed. In fact, nearly all states continue to provide teachers with a defined-benefit pension system, an expensive and inflexible model that neither reflects the realities of the modern workforce nor provides equitable benefits to all teachers.

Under defined benefit systems, states have made an obligation to fund fixed benefits for teachers at retirement. However, the financial health and sustainability of many states' systems are questionable at best. Some systems carry high levels of unfunded liabilities, with no strategy to pay these liabilities down in a reasonable period, as defined by standard accounting practices. Without reform, these systems are a house of cards, vulnerable to collapse as funding cannot keep up with promised benefits. And it is taxpayers who will have to pay if it all tumbles down.

Pension plans disadvantage teachers early in their careers by overcommitting employer resources to retirement benefits.

The contribution of employers to their workers' retirement benefits is a valuable benefit, important to ensuring that individuals have sufficient retirement savings. Compensation resources, however, are not unlimited, and they must fund both current salaries and future retirement benefits. Mandated employer contributions to many states' teacher pension systems are extremely high, leaving districts with little flexibility to be more innovative with their compensation strategies. This is further exacerbated for states in which teachers also participate in Social Security, requiring the district to pay even more toward teacher retirement. While retirement savings in addition to Social Security are necessary, states are mandating contributions to two inflexible plans rather than permitting options for teachers or their employing districts.

This approach to compensation disadvantages teachers early in their careers, as the commitment of resources to retirement benefits almost certainly depresses salaries and prevents incentives. Lower mandatory employer contribution rates (in states where they are too high; in some states they are shamefully low) would free up compensation resources to implement the kinds of strategies suggested elsewhere in the Yearbook. In addition, some states require high employee contributions; the impact this has on teachers' paychecks may affect retention, especially early in teachers' careers.

Research rationale

NCTQ's analysis of the financial sustainability of state pension system is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office, 2007, 30 and Government Accounting Standards Board Statement No. 25.

For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Robert Costrell and Michael Podgursky. "Reforming K-12 Educator Pensions: A Labor Market Perspective." TIAA-CREF Institute (2011).

For evidence that retirement incentives do have a statistically significant effect on retirement decisions, see Joshua Furgeson, Robert P. Strauss, and William B. Vogt. "The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions", Education Finance and Policy (Summer, 2006).

For examples of how teacher pension systems inhibit teacher mobility, see Robert Costrell and Michael Podgursky, "Golden Handcuffs," Education Next, (Winter, 2010).

For additional information on state pension systems, see Susanna Loeb, and Luke Miller. "State Teacher Policies: What Are They, What Are Their Effects, and What Are Their Implications for School Finance?" Stanford University: Institute for Research on Education Policy and Practice (2006); and Janet Hansen, "Teacher Pensions: A Background Paper", published through the Committee for Economic Development (May, 2008).

For further evidence supporting NCTQ's teacher pension standards, see "Public Employees' Retirement System of the State of Nevada: Analysis and Comparison of Defined Benefit and Defined Contribution Retirement Plans." The Segal Group (2010).