State's largest pension funds face shortfall

(AP) - The pension funds for hundreds of thousands of government workers and retirees aren't as fiscally fit as thought and face looming challenges, according to a report from the state legislative auditor.

The state's accounting doesn't reflect a deficit of as much as $4 billion in a fund used to pay benefits to retirees, the report said. It tied the deficit to the practice of boosting benefits for retirees when the funds did well on the market.

Legislative Auditor James Nobles recommended Monday that the Legislature end such increases.

The report also said most local governments don't set aside enough money to cover their health insurance obligations for retirees - a dilemma that's led Duluth's city government to consider major budget cuts or tax increases.

Create a More Connected Minnesota

MPR News is your trusted resource for the news you need. With your support, MPR News brings accessible, courageous journalism and authentic conversation to everyone - free of paywalls and barriers. Your gift makes a difference.

The aging of Minnesota's population makes the situation more urgent, the report's author told the bipartisan Legislative Audit Commission.

"We have a bubble here of people who are nearing retirement age in five to 10 years, and that's when this hits home," said Jody Hauer, project manager for the report.

A union leader and the heads of three big state pension funds said the funds are better off than the picture painted by the report. Government and employee contributions have been stepped up, and the Legislature last year capped future benefit increases at 5 percent for retirees.

"I think we have a solution waiting for a problem," said Eliot Seide, executive director of the American Federation of State, County and Municipal Employees.

But the audit said the higher contributions and the 5 percent cap won't cut the $4 billion deficit, though they could head off future deficits.

The audit found average retiree benefit raises of 9.2 percent a year from 1996 to 2001 - increases that the funds kept paying out even after the market took a nosedive.

Including those extra benefits worsened the financial picture for the Teachers Retirement Association, Public Employees Retirement Plan and Minnesota State Retirement System.

The financially troubled Minneapolis teachers pension fund had only half the balance it needed to cover future obligations when it was folded into the statewide Teachers Retirement Association last year.

The audit identified the St. Paul teachers pension fund as the riskiest among local government funds; its balance would cover about 70 percent of its obligations. The report urged lawmakers to require higher employee or government contributions to the fund.

Another audit found that 700 pension funds for 20,000 volunteer firefighters had enough money to meet their obligations, but the funds would have had higher investment returns if the State Board of Investment had managed them.

(Copyright 2007 by The Associated Press. All Rights Reserved.)