Office of the Legislative Auditor State of Minnesota by hY7s1p0X

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									Office of the Legislative Auditor
State of Minnesota




Postemployment Benefits for
Public Employees




August 20, 2007
                                    1
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


                                                  2
Funding Ratios Do Not Reflect the
Postretirement Fund’s Deficit
     • 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 3
Reported Status of Statewide Pension
Plans as of July 1, 2006

                        Deficit     Funding   Target
                       (millions)    Ratio     Date
    PERA                 $4,243      75%      2031
    Public Employees
    Retirement Plan
    TRA                  $1,643      92%      2037

    MSRS                   $332      96%      2020
    General Plan

                                                       4
Difference in Funding Ratios That Reflect
Postretirement Fund’s Deficit, July 1, 2006


                       Original        Revised
                     Funding Ratio   Funding Ratio

  PERA                   75%             68%
  Public Employees
  Retirement Plan

  TRA                    92%             82%

  MSRS                   96%             90%
  General Plan

                                                     5
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




                                             6
Problems With Formula to Increase Benefits
                        • Helped cause deficits
                        • Unaligned with inflation

                        14
                                    Inflation
                        12                                    Benefit Increases
    Percentage Points




                        10
                         8
                         6
                         4
                         2
                         0
                             1980     1985      1990   1995       2000     2005
                                                                                  7
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


                                                  8
Recommendations

    • 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)


                                              9
Local Teachers’ Retirement Funds

    •   St. Paul Teachers’       •   Disallow investment-
        Retirement Fund is at        based benefit
        risk for serious             increases when funds
        funding problems             have large deficits
    •   $420 million deficit     •   Consider formulas
        and 69% funding ratio        based on inflation;
        as of July 2006              consider increasing
                                     contributions
    •   Inadequate
        contributions, stock     •   2007 law changes
        market declines, and
        postretirement benefit
        increases
                                                        10
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




                                                  11
Summary of Recommendations

   •The Legislature should:
    –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

                                                12
    Postemployment Benefits for
         Public Employees
is available via the World Wide Web at:


www.auditor.leg.state.mn.us/ped/2007/
       postemployment.htm


                                     13

								
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