Minnesota Tweaks Public Pension Programs

Published July 11, 2018

Minnesota has enacted some changes to the state’s public pension programs.

The new law, signed by Gov. Mark Dayton on May 31, will alter cost-of-living adjustments for existing beneficiaries and increase government employees’ contributions to their retirement plans.

These changes will be gradually introduced into the state government’s twelve pension programs over the next six years.  Reforms of the Minnesota Teachers Retirement Association pension system will begin to take effect in 2024.

The assumed rate of return used by government actuaries to forecast pension investment returns will be reduced from 8.5 percent to 7.5 percent, and a total of $141 million in taxpayer funds will be transferred to the pension funds over the next three years.

The state’s Public Employees Retirement Association currently has enough assets on hand to pay about 53 cents on each $1 of liabilities.

Pension Ponzi Schemes?

Charles Katebi, a state government relations manager for the Heartland Institute, which publishes Budget & Tax News, says traditional defined-benefit government pension programs, including those in Minnesota, rely on fraudulent assumptions.

“The difference between a Ponzi scheme and these retirement systems is that lawmakers have the taxpayers to fall back on, and the assumption is that their tax base will continue to increase in the future and be sizable enough to pay off all these pension promises,” Katebi said.

Kim McCormick, vice president and senior policy fellow at Center of the American Experiment, says Minnesota’s pension changes merely give the appearance of change.

“Minnesota has been lying to itself about how much it can earn on assets and how big its liabilities are for years,” McCormick said. “We were the last public fund in the country to assume that we could earn 8.5 percent consistently on our assets and use 8.5 percent as our discount rate to calculate future liabilities. Both the Teachers Retirement Association and the St. Paul Retirement Fund, the last independent fund in the state, are wildly underfunded.

“There are a lot of assumptions in this bill that have to come true in order for Minnesota’s pensions to actually be on the path to full funding,” McCormick said.

Suggests 401(k)-Style Program

Katebi says real pension reform would move employees to a defined-contribution pension plan, similar to 401(k) plans enjoyed by workers in the private sector.

“Ideally, you would move from a defined-benefit system, where the taxpayers are on the hook for those promises, to a defined-contribution system, where what a retiree receives is determined by the fixed contributions that the agency and the employee make, and their investment returns,” Katebi said.

Forecasts More Shortfalls

McCormick says she expects the state’s pension problems to get worse.

“I have warned lawmakers, most of whom do not understand pensions, that pensions will be back in front of them soon, with the same—if not more severe—funding shortfalls.