1 Office of the Legislative Auditor State of Minnesota Postemployment Benefits for Public Employees August 20, 2007

2 Pension Plan Deficits and Benefit Formula 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

3 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 Postretirement Fund’s Deficit

4 Reported Status of Statewide Pension Plans as of July 1, 2006 Deficit (millions) Funding Ratio Target Date PERA Public Employees Retirement Plan $4,24375%2031 TRA$1,64392%2037 MSRS General Plan $33296%2020

5 Difference in Funding Ratios That Reflect Postretirement Fund’s Deficit, July 1, 2006 Original Funding Ratio Revised Funding Ratio PERA Public Employees Retirement Plan 75%68% TRA92%82% MSRS General Plan 96%90%

6 Effects 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

7 Problems With Formula to Increase Benefits Helped cause deficits Unaligned with inflation Percentage Points

8 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

9 RecommendationsRecommendations 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)

10 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

11 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

12 Summary 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:

13 Postemployment Benefits for Public Employees is available via the World Wide Web at: postemployment.htm