Minnesota Lawmakers Adopt Pension Funding Improvements
Policies to manage future increases in pension debt can help contain costs as states approach full funding
Pension legislation signed into law by Minnesota Governor Tim Walz (D) in May includes important provisions that will help the state better assess what would be needed to adequately fund promised pension benefits. Under the new law, state officials will use an approach called layered amortization to estimate the annual governmental contributions needed to pay down unfunded public retirement system liabilities. This change reflects recommendations of a working group established by the Minnesota Legislature last year to identify best practices for ensuring that pension funding policies are transparent to policymakers, beneficiaries, and the public.
Lawmakers tasked the working group—made up of executive directors and staff of the state’s retirement systems—with reviewing state policies for paying down pension debt and recommending legislation to “conform to actuarial best practices for amortizing liabilities.” The Pew Charitable Trusts provided research on state approaches to setting amortization policies, providing context to the technical materials and research being considered by the group.
The working group’s final report recommended the legislative changes ultimately adopted this year. These will implement layered amortization to calculate the cost of paying down different components of the state’s unfunded pension liability—including legacy liabilities and new liabilities resulting from changes to benefits, assumptions, and investment experience—over different periods. In addition, the group recommended amendments to state guidelines for retirement system actuarial reporting that will improve transparency by requiring annual reviews of projected amortization payments. Minnesota’s efforts reflect a broader trend among states to implement more effective policies for paying down accumulated unfunded pension liabilities with predictable and stable costs.
Understanding the role of amortization policies
Effective policies governing the amortization of pension debt can help governmental plan sponsors to manage long-term costs and contain volatility in annual contributions while making sure that liabilities don’t increase over time. A white paper published in 2024 by the Conference of Consulting Actuaries (CCA) outlines key policy objectives and recommendations for ensuring that amortization methods allocate costs fairly, offer stable contributions, reduce volatility, and provide adequate funding.
Public pension plans amortize, or pay down, unfunded liabilities over multiyear periods. These periods can be “closed,” meaning that unfunded liabilities need to be paid in full after a specific number of years, or “open,” in which the costs of paying for unfunded liabilities are allocated over a number of years, with the clock resetting on a rolling basis to refinance the remaining liability.
Different approaches can offer trade-offs. Closed amortization ensures a predictable date for achieving full funding. However, that approach can lead to contribution volatility toward the end of the period, as any market downturns or other losses will need to be paid for over a shortened number of years. This can lead to sharp increases in required contributions, with less flexibility to adjust if financial pressures increase. Conversely, open amortization allows for more stable contribution rates but delays full funding. That can mean perpetual unfunded liabilities—leaving costs that will be billed to future taxpayers for shortfalls that plans are facing today.
To balance these trade-offs, CCA recommends layered amortization, which offers a hybrid approach. Layered amortization tracks the gains and losses in individual years and assigns a closed funding period, or layer, for each year’s unfunded liability—or surplus. This achieves a core advantage of closed amortization—a defined period over which any unfunded liability will be paid off. And it maintains the strength of an open approach in terms of keeping employer contribution rates stable and avoiding unnecessary volatility. The CCA initially identified layered amortization as a preferred strategy in a 2014 report on actuarial funding practices. With the CCA’s continued support for layered amortization, this approach has been identified by actuaries for more than a decade as a way to balance the benefits of an effective funding policy with the need to avoid unpredictable and volatile contributions.
Layered amortization policies, such as those adopted in Minnesota, can help states avoid spikes in actuarially determined pension contributions as their retirement systems approach full funding while also maintaining the commitment to pay down any accumulated unfunded liabilities at the time of the policy change. As a result, this approach has also been recommended by the Government Finance Officers Association and has been identified as a promising practice by Pew.
More states adopt or consider layered amortization
A growing number of states have moved to implement layered amortization in recent years. In addition to Minnesota, Maryland is one of the most recent states to do so, through legislation adopted in 2023, to minimize the effects of potential future shocks on required pension contributions as the state approaches its target date of 2039 for full pension funding.
Other states are using actuarial analyses and risk assessments to evaluate projected future contributions under their current amortization policies as well as alternative approaches. In Vermont, risk assessments produced earlier this year for the state employees and teachers retirement systems showed that the state could see smaller increases in required future contributions through 2038 in the event of a downturn or investment loss by using layered amortization than under its current closed period policy. These assessments will help policymakers understand potential outcomes and costs under current policies and allow them to evaluate tools for managing volatility as the systems approach their full funding targets.
Effective funding practices ensure predictability and transparency
The adoption of layered amortization by Minnesota and other states in recent years demonstrates how policymakers can evaluate pension funding to ensure that policies are effective, transparent, and aligned with practices supported by actuaries and government finance organizations. For states approaching full pension funding, layered amortization can provide flexibility and stable costs even if investments fall short of plan expectations near a plan’s target funding date.
The approach also offers transparency to stakeholders by allowing policymakers to track and calculate the costs of paying for adjustments to benefit improvements or changes in plan assumptions alongside any investment gains or losses. By implementing this leading practice, alongside other tested and effective funding strategies, states can continue to build on the pension funding progress of the past decade and ensure that their retirement systems remain stable for decades to come.
Stephanie Connolly is an officer, David Draine is a principal officer, and Corryn Hall is a senior manager with Pew’s state fiscal policy project.
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