Pension Sustainability: Minnesota
Pensions Policy
Analysis of Minnesota's policies
As of July 1, 2015, the most recent date for which an actuarial valuation is available, Minnesota's pension system for teachers is 77.1 percent funded, an increase of 5.5 percentage points since NCTQ's last report. Its current pension debt exceeds $6,800 per pupil throughout the state. It also has an amortization period over 22 years. This means that if the plan earns its assumed rate of return of 8 percent and makes its full actuarially determined contribution payments, it would take the state over 22 years to pay off its unfunded liabilities. Minnesota's funding ratio does not meet conventional standards, and the state's system is not financially sustainable according to actuarial benchmarks.
Minnesota does not currently commit excessive resources toward its teachers' retirement system. The mandatory employee contribution rate to the defined benefit plan is 7.5 percent. Most employers contribute 7.5 percent under the Coordinated Plan. Though these rates are reasonable, even with teachers' and local districts' additional 6.2 percent contribution to Social Security, they are close to what is considered excessive. State statute requires that unfunded liabilities must be paid off by June 30, 2037, but these rates do not meet the annual required contributions to meet this amortization period. The combined annual required contribution to meet this amortization period is 17.87 percent, implying an approximate 2.9 percentage point deficiency.
Recommendations for Minnesota
Ensure that the pension system is financially sustainable.
The state would be better off if its system was more that 95 percent funded to allow protection during financial downturns. Minnesota should consider ways to improve its funding level without raising the contributions of districts and teachers above excessive levels. Improving funding levels necessitates, in part, systemic changes in the state's pension system. The goals on pension flexibility and pension neutrality provide suggestions for pension system structures that are both sustainable and fair.
State response to our analysis
Minnesota was helpful in providing information that enhanced this analysis.
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Delivering Well Prepared Teachers
- Admission into Teacher Preparation
- Elementary Teacher Preparation
- Elementary Teacher Preparation in Reading Instruction
- Elementary Teacher Preparation in Mathematics
- Early Childhood
- Middle School Teacher Preparation
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- Secondary Teacher Preparation in Science and Social Studies
- Special Education Teacher Preparation
- Special Education Preparation in Reading
- Assessing Professional Knowledge
- Student Teaching
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Identifying Effective Teachers
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- Evaluation of Effectiveness
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- Tenure
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Retaining Effective Teachers
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Pensions
Research rationale
Teacher salaries are just one part of the compensation package that teachers receive. Virtually all teachers are also entitled to a pension, which, upon vesting, provides compensation for the rest of their lives after retirement. In an era when retirement benefits have been shrinking across industries and professions, teachers' generous pensions remain fixed. In fact, nearly all states continue to provide teachers with a defined-benefit pension system, an expensive and inflexible model that neither reflects the realities of the modern workforce nor provides equitable benefits to all teachers.
Under defined benefit systems, states have made an obligation to fund fixed benefits for teachers at retirement. However, the financial health and sustainability of many states' systems are questionable at best. Some systems carry high levels of unfunded liabilities, with no strategy to pay these liabilities down in a reasonable period, as defined by standard accounting practices. Without reform, these systems are a house of cards, vulnerable to collapse as funding cannot keep up with promised benefits. And it is taxpayers who will have to pay if it all tumbles down.
Pension plans disadvantage teachers early in their careers by overcommitting employer resources to retirement benefits.
Pension Sustainability: Supporting Research
NCTQ's analysis of the financial sustainability of state pension system is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office, 2007, 30 and Government Accounting Standards Board Statement No. 25.