Bill would reduce assumed rate of return on state investments, require more money for retirement plans

Lawmakers are mulling a bill to reduce the assumed rate of investment return for all state pension plans from 7.5% to 7%.

Given recent market volatility and low investment returns, some lawmakers say assuming big returns is unrealistic and could lead to shortfalls later.  

If the state assumes lower returns on its investments, however, that means employees and the state would need to kick more money into the plans to keep them adequately funded. 

Jill E. Schurtz, executive director and chief investment officer for the Minnesota State Board of Investment, recently told the Legislative Commission on Pensions and Retirement she’d be more comfortable with a 7% assumption.

“If we overstate the investment return assumption and we cannot actually achieve it over time, there will be a shortfall for all retirees present and future,” Schurtz said. “I think that the strongest signal that the State Board of Investments can send to retirees is that we will do whatever it takes to make sure that we never miss a payment.”

Brian Rice, representing the Minnesota Professional Fire Fighters and Minnesota Police Fraternal Association, said lawmakers shouldn’t change the assumption without ponying up money to help cover the resulting shortfall. He noted that in 2014 and 2018, when the Legislature lowered the assumption from 8.5% to 7.5%, it provided money to help cover the shortfall.

Minnesota ranks 46th nationwide in state contributions to retirement funds, he said.

“Minnesota’s been doing pensions on the cheap for a long time,” Rice said.

Sen. Jordan Rasmusson, R-Fergus Falls, sponsor of a Senate bill reducing the assumption (SF1377), said out of 131 public retirement plans nationwide, only five outside Minnesota use a higher assumption than Minnesota.

“Minnesota is underfunding our state pensions,” he said.

Erin Leonard, executive director of the Minnesota State Retirement System, said lowering the assumption would bring Minnesota in line with the national median of 7%. 

If the assumption were reduced for the state’s nine plans, the state would need to bridge an additional $5.9 billion shortfall in the coming decades. Four of the nine plans would not be on track to reach full funding by the state’s 2048 target date.  

For example, the Public Employees Retirement Association general employee plan’s unfunded liability would increase from $4.2 billion to $6.1 billion. The police and fire plans’ unfunded liability would increase from $1 billion to $1.7 billion. And the correctional plan would go from being $31 million overfunded to $49 million underfunded.

And for the police and fire plan, that doesn’t include the impact of the wave of cops retiring early due to post-traumatic stress disorder. If you incorporate those higher-than-expected numbers, the plan’s unfunded liability is expected to grow by about $40 million annually unless members and employers put more money in the plan.

The House bill, (HF1468), was laid over for possible inclusion in a larger bill later in the session. The chair of the commission, Rep. Kaohly Vang Her, DFL-St. Paul, said lawmakers haven’t decided what to do about the funding shortfalls. 

Updated at 6:06 p.m.