KEEPING THE PROMISE: PENSIONS Presentation Based on 2016 LCPR Data

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2 KEEPING THE PROMISE: PENSIONS 2017 Presentation Based on 2016 LCPR Data

3 WHO S COUNTING ON US? 318,849 active public employees 311,152 retirees, survivors, and disabled people 11.5% of Minnesota s population (630,001 people)

4 SCOPE OF THE PROBLEM 120% 100% 80% Figure 1: Historical ACTUARIAL VALUE Funding Ratios for All Plans, Leading to $17.8 Billion Unfunded Liability 99.7% 100.1% 97.5% 93.6% 90.4% 88.0% 87.0% 84.3% 81.0% 76.5% 78.8% 78.6% 74.9% 74.6% 76.0% 78.5% 77.5% $17.8 Billion MAKING PROMISES WITHOUT PAYING FOR THEM 60% 40% 20% $131,151,328 $(55,917,874) $1,205,638,827 $3,199,555,164 $5,022,969,866 $6,597,442,681 $7,494,333,894 $9,566,374,885 $11,878,089,380 $15,366,903,229 $13,137,078,492 $13,448,601,074 $16,654,825,141 $17,225,935,852 $17,525,176,245 $16,237,518,751 $17,818,897,000 0%

5 SCOPE OF THE PROBLEM Figure 2: ACTUARIAL VALUE of Unfunded Liability for All Plans When Using Standard Pension Assumptions (Billions of $) $ % Funded $22.5 $24.8 $31.6 $44.2 8% thru 2017, 8.5% after 6.7% 6.0% 4.3% 2.0% Current Assumption 73.2% Funded 71.2% Funded 66.0% Funded Under Alternative Discount Rate Assumptions 58.1% Funded SHIFTING COSTS TO OUR CHILDREN AND GRANDCHILDREN

6 Accrued Liabilities and Current Assets (Billions of $) Additional State and Local Gov't Contributions (Millions of $) CROWDING OUT OTHER PRIORITIES Figure 3: Unfunded Liability is Already Crowding Out Other Spending Priorities $85 $80 $75 $70 $65 $60 $140 $120 $100 $80 WARREN BUFFETT CALLS PENSION PROMISES A GIGANTIC FINANCIAL TAPEWORM $55 $50 $45 $40 $35 $ $60 $40 $20 $0 Direct State Funding Current Assets Employer Add'l Cont. Accrued Liability

7 CROWDING OUT OTHER PRIORITIES Figure 4: Substantial Portion of 2016 Pension Contributions Pay Unfunded Liability Cost (Millions of $) MINNESOTA IS IN A HOLE AND JUST KEEPS DIGGING Normal Cost + Expenses $1,456 Unfunded Liability Cost $958 Employee Portion $426 State & Local Gov't Portion $532

8 an infinite number of years would be required to eliminate the unfunded liability (the unfunded liability will never be eliminated)... the unfunded liability as a percent of pay will increase without limit to an infinite amount. Source: Minnesota Legislative Commission on Pensions and Retirement, MSRS General Valuation Report, Page 1 (2013).

9 CROWDING OUT WHAT ELSE COULD WE BUY FOR $1 BILLION?

10 PAYING MORE BUT FALLING BEHIND 35% 30% Figure 5: Contributions are Rising as a Percent of Payroll for the Major Pension Funds 29.5% LEGISLATORS ARE NOT GOOD AT MANAGING PENSIONS 25% 20.0% 20% 15.9% 15% 10% 5% 0% 12.8% 8.4% 9.3% 11.0% 14.6% MSRS PERA-General PERA-Police and Fire TRA

11 Millions of Dollars HOW DID WE GET INTO THIS MESS? 3,000 Figure 6: Actual Contributions Continually Fail to Make the Required Contributions Necessary to Fully Fund Minnesota Pensions (All Plans) FALLING SHORT: BORROWING FROM THE FUTURE 2,500 2,000 1,500 1, Total Requirements Total Contributions

12 HOW DID WE GET INTO THIS MESS? 8.50% 8.25% 8.00% 7.75% 7.50% 7.25% 7.00% 6.75% 6.50% Figure 7: Minnesota Pension Plans Continue to Use the Highest Assumed Rates of Return on Investments TRA is one of 2 plans still using an 8.5% ARR (8.4%) MSRS, PERA, and St. Paul Teachers use an 8.0% ARR Distribution of Investment Return Assumptions Among Public Pensions, NASRA Survey Results 31 MINNESOTA S ASSUMED RATE OF RETURN IS EXCESSIVE

13 MINNESOTA LEGISLATURE HAS TRIED TO FIX THE PROBLEM Fixing giveaways Sustainability measures in 2010 Market crash did not cause pension problem Solid returns have not closed the gap

14 CONSEQUENCES Crowding Out effect Increased borrowing and scrutiny Putting pension assets at risk Pension problem will hurt job creation in public and private sector

15 DESIGNING A SOLUTION Transparent Predictable Affordable Fully funded

16 THE SOLUTION MUST ADDRESS ALL STAKEHOLDERS Retirees Current and future employees Current and future taxpayers State and local governments

17 RECOMMENDATIONS Fully fund the defined benefit plan for retirees and current employees Close the plans Stop adding new liabilities

18 RECOMMENDATIONS Accurately state and fully disclose the true cost of pensions for reporting purposes Use realistic assumptions Make public pension data transparent and accessible No more cash bailouts

19 RECOMMENDATIONS Create a defined contribution plan for all new public employees Offer a wide range of options Implementation by the Legislative Auditor

20 RECOMMENDATIONS Preserve and grow pension assets; pay down unfunded liability COLAs Don t chase unrealistic returns Fix the debt payment Review borrowing to pay for benefits

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