New reporting requirements from the federal government have changed the way Minnesota and other states calculate the funding level of their pension systems.
The Government Accounting Standards Board (GASB) this spring released new reporting requirements after the Great Recession that requires states to make more conservative assumptions on the returns they expect from the investments that fund their pension system.
These assumptions impact the discount rate, which is used to calculate the future value of current pension plans based on factors such as return on investment, interest accrued, and benefits paid out.
Bloomberg reported that Minnesota, along with Texas, Kentucky, and New Jersey, uses a significantly lower discount rate than other states. The discount rate is essentially an assumption on the returns of the state’s investments, and a higher rate typically corresponds to a higher percentage of unfunded pensions.
Under the previous GASB guidelines, and as recently as 2015, Minnesota was able to report that it’s pensions were up to 80 percent funded, putting the state in the top ten of states with the highest pension funding percentages.
But under the new guidelines Minnesota had to scale back its optimistic projections and calculate the return on its investments more conservatively using a new, lower discount rate, which impacted the state’s funding numbers. Minnesota now reports that just 53 percent of its pensions are being funded completely.
Susan Lenczewski, the Executive Director of Minnesota’s Legislative Commission on Pensions and Retirement, said that the GASB rules don’t change the state’s funding formula, but that Minnesota’s pensions are underfunded independent of the reporting rules. “It’s a crisis,” Bloomberg quoted her as saying.
“Funding is not keeping up with benefit accruals,” she said in an interview with Watchdog.org, and noted that in Minnesota benefits and state contributions are set by statute. “The best way to address this is for the legislature to act on it.”