The Legislative Commission on Pensions and Retirement (LCPR) met Wednesday and Thursday to hear testimony from the statewide retirement systems and the St. Paul Teachers Retirement Fund Association (SPTRFA) regarding sustainability measures necessitated by improvements in public employee life spans.
No action was taken on sustainability proposals, but the commission approved changes to the retirement systems’ actuarial assumptions on mortality, wage inflation and payroll growth to reflect recent experience study results. Those changes are effective immediately.
The LCPR also approved a lowering of the investment return assumption to 8 percent (Teachers Retirement Association only; the Legislature lowered the other systems’ investment assumption last year). This change will be included in the 2016 omnibus pension bill.
Dave Bergstrom, executive director of the Minnesota State Retirement System (MSRS), and Jay Stoffel, deputy executive director of TRA, guided LCPR members through a presentation on the financial impact of the experience study results.
“What we have found is that our members are living two years longer than what we had experienced, and that is just in the last 15 years,” Bergstrom said. “So why does that matter? Two years longer life expectancy means two years longer of benefit payments. So while we’re finding that employees are working later in their careers, we’re finding they’re collecting two years longer.”
As a result of the mortality changes, MSRS’ funded ratio drops to 84 percent, Public Employees Retirement Association (PERA) to 77 percent, and TRA to 75 percent. “This is something our boards felt we needed to address, and the sooner we address these issues the better,” Bergstrom said.
Stoffel said that a significant change for TRA is dropping the assumed rate of return on investments from 8.5 percent to 8 percent. On the demographic side, TRA is seeing similar trends as MSRS. “Teachers are living two years longer, our population is 75 percent female, our population is nearly 100 percent college educated and we’re from Minnesota. Those factors weigh heavily in the improvement in mortality in our membership,” Stoffel said, adding that TRA’s sustainability proposal addresses the resulting 4.5 percent deficiency.
Doug Anderson, executive director of PERA, said PERA’s experience study tells a similar story, but the increase in liabilities due to longevity is offset by a low retiree cost-of-living adjustment (1 percent until the plan is 90 percent funded; 2.5 percent thereafter). PERA is projected to reach 100 percent funded in a 30-year time frame; and as a result, there is no urgency to take action at this time, Anderson said.
Bergstrom outlined MSRS sustainability proposals aimed at making sure the plans are moving toward 100 percent funding. For the MSRS General Plan, the proposal increases the employee contribution from 5.5 percent to 6 percent, increases the employer contribution from 5.5 percent to 7 percent, reduces the retiree COLA from 2.0 percent to 1.75 percent, and eliminates the automatic trigger raising the COLA to 2.5 percent when the plan reaches 90 percent funded. The COLA changes would also apply to the MSRS Unclassified, Legislators, and Correctional plans. MSRS is also seeking a $6 million appropriation to correct past underfunding of the Judges Plan.
LCPR chair Rep. Tim O’Driscoll, R-Sartell, asked how long the state would have to do additional appropriations for the Judges Plan. Bergstrom said about 25 years.
Stoffel said TRA staff has spent months holding meetings with stakeholder groups – active employees, unions, retired groups, employer groups – to talk about ways to address TRA’s funding deficiency. The resulting proposal covers three major areas: contribution rates, the retiree cost-of-living adjustment, and the amortization period. TRA’s proposal would leave employee contribution rates unchanged at 7.5 percent, increase the employer rate from 7.5 percent to 8.5 percent, and reduce the COLA from 2 percent to 1 percent for five years and 1.75 percent thereafter. The proposal also extends the amortization period from 21 to 30 years.
Like MSRS, TRA is proposing removing the automatic trigger raising the COLA to 2.5 percent once the plan reaches 90 percent funded.
“We believe we need to make these changes going forward,” Stoffel said. “We need to be ready to take on more market volatility, possibly. A 100 percent funded ratio is where we really want to be, and these changes in essence get us there over a 30-year period and the 4.5 percent deficiency is reduced to a small 0.3 percent.”
Rep. Sarah Anderson, R-Plymouth, asked what the impact of the employer contribution rate increase would mean for each school district in the state. Stoffel said he would provide numbers for that, but he estimated that for every 1 percent increase in the contribution rate the impact would be approximately a half to a quarter percent of a school’s operating budget.
Jill Schurtz, executive director of the SPTRFA, discussed expected mortality improvements for the St. Paul teachers plan and said she is seeking no change in the employee contribution rate of 7.5 percent but is proposing extending phased-in employer contribution rate increases until reaching 8 percent for fiscal year 2019.
Rep. Ann, Lenczewski, DFL-Bloomington, asked Stoffel to address TRA’s proposals regarding re-employed annuitants. Stoffel said that the vast majority – about 80 percent – of these re-employed annuitants are working as full- or part-time substitute teachers. At present, employers pay no contributions to TRA for those positions. In fact, Stoffel said, this incentivizes employers to hire retirees for those positions instead of younger teachers.
Rep. Tony Albright, R-Prior Lake, asked whether these return-to-work retirees aren’t interfering with the provisions of their pension and whether there is a minimum threshold for eligible hours of service. Stoffel said that the proposed 1 percent employer contribution would have no bearing on the employee or their pension; current law allows the retiree to earn up to $46,000 a year without it affecting their pension. However, another proposed change involves this earnings limitation. At present, if a person exceeds the $46,000, half of the excess amount is held as a deferral, which is returned to the person the following year. TRA is proposing forfeiture of the excess amount, Stoffel said.
The Wednesday session ended with testimony from representatives of employer stakeholder groups. Grace Keliher of the Minnesota School Boards Association, which has a representative on the TRA board, said that while MSBA “wholeheartedly” supports TRA and acknowledges the importance of pension benefits in attracting and retaining employees, another increase on top of multiple increases over the past 10 years is “just a hit we can’t take.”
“We do not have a levy for increased pension costs, we have to manage those within our school budgets. … Either the state has to give us a dedicated levy to cover this expense or additional aid to cover it going forward,” Keliher said, adding that state aid would be preferred.
Gary Amoroso of the Minnesota Association of School Administrators, echoed Kelliher’s comments, saying that if legislature moves ahead with a plan for a 1 percent increase to the employer contribution rate, it would have to be paid for. “If this mandate were to go forward without additional funding, we would be challenged. We would be requesting that funding be provided by the state,” he said.
Scott Croonquist of the Association of Metropolitan School Districts testified that while the AMSD fully understands that TRA needs to be brought back into stability, school districts are not in a position to just absorb that 1 percent cost. “Our preliminary results tell us it will be about a $50 to $60 per pupil increase annually,” Croonquist said. “So that’s going to be about a 1 percent formula increase that would be needed just to cover that cost.”
The commission also heard testimony summarizing the retirement systems’ non-controversial administrative bills for inclusion in the eventual omnibus pension bill.
Kim Crockett of the Center of the American Experiment testified Thursday during public comments, stating that while she has no particular objections to the commission making “tweaks,” the plans “really aren’t in better shape than when I started hanging out with you five years ago.”
Crockett said that the commission should seriously consider moving public employees into defined-contribution, or 401(k)-type, plans to “stop the digging and figure out how to keep the promise to employees who have duly paid into these and are relying on you for a secure retirement.”
Sen. Sandy Pappas, D-St. Paul, responded that a recent study done on transferring from defined-benefit (DB) to defined-contribution (DC) plans indicated that the transition costs were quite high. (The retirement systems and their actuaries concluded in the study that it would cost the state $3 billion to transition public employees from a DB to a DC retirement plan.)
Pappas suggested that the retirement systems’ legislatively mandated 2011 Plan Design Study be distributed and reviewed again by commission members. Pappas said she doesn’t believe switching to DC is a solution and she defended the plan directors’ efforts to work with the commission on solutions.
Crockett said that the 2011 study presented to the commission has been “shredded” by several studies that Crockett shared with the commission last year. She said that the Minnesota study was named specifically as being “mistaken and debunked.” Public sector pension funds are making that transition, and while it is a painful one, it is being done around the nation, Crockett said. She added that the pension systems study needs to be “put on the shelf and stay there.”
Sen. Julie Rosen, R-Vernon Center, said that she stands by the Minnesota study, adding that it was well done and actuarially sound. She asked Crockett who or what groups had “shredded” the study. Crockett named Robert Costrell of the Manhattan Institute and Josh McGee of the Laura and John Arnold Foundation, who testified before the LCPR in 2014 and whose organization is devoted to the privatization of public pensions. Crockett said the analysis of the Minnesota study “was really quite devastating.”
Sen. Jeff Hayden, D-Minneapolis, said he took exception to the cavalier nature of the conversation around the Minnesota study and the use of inflammatory words such as “shredded” and “myth.” Hayden said he was offended at the casual nature of Crockett’s accusations and insinuations regarding the integrity of those involved in pension fund oversight.
“This is pretty serious stuff, and if we come forward with a set of ideas we have to be real clear and have to be able to show here’s why, and here are the experts, and here is the background,” he said.