Pensions update — without addition state aid, legislative proposal too costly for school boards

Local school districts have two pension funds impacting school employees. The Teacher Retirement Association (TRA) covers school employees — including licensed staff, teachers, principals and superintendents. The Public Employees Retirement Association (PERA) covers non-licensed staff (custodians, food service, bus drivers, and para-professionals). Both of these funds are struggling with deficiencies that could increase employer pension costs for school districts.

PERA
School districts’ employees represent one-half of the membership in PERA. In 2015, the PERA Board of Directors approved updating their plan’s economic and demographic assumptions. These changes will increase PERA’s current fund deficiency from -0.3 percent to -0.7 percent. The PERA Board discussed a proposal for increasing their revenues but decided against it.

TRA: History of the TRA pension fund
Over the last nine years, local school boards have faced two significant TRA employer pension increases: (1) in 2006, employers’ costs went from 5 percent of the statewide salary schedule to 5.5 percent and (2) in 2010, employers’ contributions were increased by 2 percent to 7.5 percent and stair-stepped in from 2011-2014.

TRA legislative proposal
TRA’s new legislative proposal for 2016 is derived from the economic pressure of increased mortality rates (people are living two years longer than forecasted, hence receiving more pension payments during their lifetime) and the rate of return for pension investments has dropped.

To confront these growing economic forces the TRA Board has suggested these actions for legislators to enact:

  • The Legislative Commission on Pensions and Retirement’s principle philosophy over the last 10 years is employees and employers share the burden of paying the plan’s normal cost on a relatively equal basis. The TRA proposal does not increase employee contribution rates, but does increase employer contribution rates from 7.5 percent to 8.5 percent. If the proposed legislation is enacted, the TRA employer contribution rate will be the highest among the state pension plans.
  • The new plan increases funding by increasing employer costs by 1 percent or $43 million annually. These numbers work out to be $40 to $60 per pupil. The cost for this legislative proposal would go into effect until July 1, 2017. Employers would also have to contribute 8.5 percent on behalf of retirees coming to work for the school district.
  • Currently, TRA is supposed to be fully funded by 2037 — this proposal would push it out until 2046. This action saves no money for the fund but does shift costs into the future.
  • Removing the cost of living adjustment (COLA) trigger and creating a permanent 1.75 percent COLA. This change removes the automatic COLA adjustment up to 2 percent if the fund were to reach 90 percent funded status.
  • A school district would face increased costs when employing a retiree. The legislative proposal would require employers to make regular pension contributions for reemployed retirees. But the retirees would not be required to make contributions and would not earn additional pension benefits. The increased employer costs would not benefit the retiree and the only purpose appears to be equalizing the employer cost of hiring retirees versus active employees.
  • This legislative proposal would also lower the amount TRA deducts from the salary of a retiree making above $46,000. Currently the deduction is eventually returned to the retiree, but under this proposal it would be forfeited to TRA. The forfeiture would begin July 1, 2020. This would negatively impact retirees coming back into the education field and the ability of school districts to hire qualified education candidates by making it a less attractive option for retirees. The TRA fund would benefit from this change.
  • The total impact of this legislation on the TRA fund is significant but the need for action is not as critical as it was in 2009. If no action is taken, the plan is not projected to default; however, the funding ratio will flatline over the next 30 years.
  • If adopted, this legislative proposal will get a jump on the probable need to address another reduction in the interest rate assumption for the future. It would also minimize the vulnerability of the fund.

MSBA testimony
MSBA
strongly suggested to the Legislative Committee on Pensions and Retirement that our association cannot support this legislative proposal unless there is additional state aid or special levy authority to cover our increased costs. Presently school districts don’t have an ongoing source of revenue to cover increased pension.

About mnmsba

The Minnesota School Boards Association, a leading advocate for public education, supports, promotes and strengthens the work of public school boards.
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