State pension funds face big shortfall

05/05/2006

But officials question tone, timing of Taxpayer Association’s study

BY PATRICK SWEENEY
Pioneer Press

Minnesota’s largest pension funds for public employees are under-funded by about $10 billion, and taxpayers could be on the hook for making up the difference if the stock market underperforms the state’s aggressive expectation for investment earnings, a new study concludes.

The report, prepared by the nonpartisan Minnesota Taxpayers Association, said the under-funding resulted, in large part, from state laws that permanently increase retirees’ pensions when investment returns are high but do not reduce pensions when stock prices and dividends drop.

The report comes as lawmakers consider a long-delayed state bailout of a Minneapolis teacher retirement fund that will cost the state about $18 million a year.

But state pension officials, including Auditor Pat Anderson, on Thursday questioned several aspects of the association’s study, including its estimate of the total under-funding in public pension funds. They accused the Taxpayers Association of overstating the threat that taxpayers will likely have to put new money into other pension funds.

“There’s nothing new in here,” Anderson said of the study.

In December, Anderson recommended that any pension increases attributable to stock market gains be capped at 5 percent a year. The House and Senate are considering proposals to enact that cap.

The issue about the size of the under-funding relates to how much of the funding shortfall ultimately might have to be borne by taxpayers. About $3.7 billion of the $10 billion — money required to pay future pensions for current retirees — is not legally the responsibility of taxpayers.

Lynn Reed, the Taxpayers Association’s executive director, argued, though, that if a stock market collapse were to threaten the state’s ability to make full pension payments, lawmakers would face moral and political pressure to cover the shortfall.

Anderson, who repeatedly has urged the Legislature to fix a $1 billion shortfall in the Minneapolis Teachers Retirement Fund Association before the fund becomes insolvent, said most of the state’s other public employee pension funds are on track to become fully funded over about the next 30 years.

Full funding could come in half that time if the funds’ investments perform at historic earnings levels, she said.

The average funding level for major state employee pension funds, including the fund for current retirees, is 81 percent.

In a memo to the House-Senate Legislative Commission on Pensions and Retirement, Larry Martin, the commission’s top staff member, said the Taxpayers Association study had an “alarmist tone” that mischaracterized the solvency of most public pension funds.

“I see no alarmism here,” Reed responded. “I see cautious analysis and prudent recommendations.”

The Taxpayers Association recommended that:

• State law be changed to eliminate any permanent benefit increases based on short-term stock market increases.

• The governor list the state’s annual pension costs in budgets.

• Funding ratios for pension funds covering current employees and retirees be publicly reported.

Investment guidelines, built into state law, assume the State Board of Investment will earn an average annual return of 8.5 percent on the pension contributions it invests. The Taxpayers Association did not recommend reducing that assumption, but it said it is a more aggressive return than most states expect.

“It seems pretty rosy looking ahead, and we’d like to see less risk for the taxpayers,” Reed said.

Anderson and Martin defended the 8.5 percent return as doable. Martin said the State Board of Investment has exceeded the 8.5 percent goal over the past 10- and 20-year periods.

In testimony Thursday before the House-Senate Legislative Commission on Pensions and Retirements, Reed said the Taxpayers Association pension study was funded by two groups of Realtors. He acknowledged the association gave KARE-TV reporters exclusive access to the report as it was being developed.

Several lawmakers accused the Taxpayers Association of timing the report’s release on Wednesday to television’s sweeps weeks.

Sen. Larry Pogemiller, DFL-Minneapolis, chairman of the pension commission, called the report a “ham-handed” attempt to scare people about the condition of state pension funds.