Moody’s Calls Minnesota’s Pension Reform ‘Far From a Cure All’

Credit rating agencies say fixes for the severely underfunded retirement system don’t go far enough.

The credit rating agency Moody’s is not impressed with Minnesota Gov. Mark Dayton’s new pension overhaul.

Dayton’s pension changes are aimed at stabilizing the benefits of more than 500,000 retirees and public workers, but it’ll come at a cost. The benefits of retired teachers and local government workers will be reduced while the state, employers, and employees will increase contributions.

The reforms cut $3.4 billion in future debt coming from Minnesota’s $16.2 billion problem, and could reach full funding in 30 years, but Moody’s said the efforts were “far from a cure-all” in a report last week. Minnesota’s pension system is 53% funded, according to a report from Pew Charitable Trusts.

Although Moody’s estimates the new laws will instantly cut 20% of the $21 billion Teachers Retirement Association’s pension liabilities, it doesn’t go far enough, the agency contends. It notes that the debt is going to be roughly 150% of payroll.

The teacher’s fund’s obligations have nearly doubled over the past decade, the Star Tribune reports. The teacher’s program is one of the state’s four public pension systems. The others are the Public Employees Retirement Association ($28 billion), the Minnesota State Retirement System ($22.3 billion), and the $1 billion St. Paul Teachers Retirement Fund Association.

Other credit-rating agencies’ evaluations have been less harsh, although still critical.

One week after the governor’s reform was signed, S&P said it was a positive step in state funding, but the agency was not fond of employee and employer contributions remaining a percentage of payroll. The report suggested the legislature make additional adjustments to state pension plans to “keep from lagging behind actuarial requirements.”

“The question is: How soon will those adjustments need to be made and will there be the political willingness to do so at that time?” said the S&P report, which also thought the state’s new 7.5% investment rate of return —which the reform dropped from 8% and 8.5%— was too optimistic.

Fitch Ratings did not expect near-term funding improvements as pension funds affected by the global financial crisis could see another economic downturn soon, in addition to higher life expectancies and more retirement payouts.

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