Trib-Actives - Summer 2010

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The law, authored by Senator Don Betzold (DFL-Fridley) and Representative Mary Murphy (DFL-Hermantown) contain changes designed to stabilize and improve TRA’s funding condition. Like most retirement plans, TRA’s funding condition was weakened due to substantial investment losses incurred during 2008 and early 2009.

The bill contains the financial sustainability provisions of employee and employer contribution rate increases and reduced annual retiree benefit increases recommended by the TRA Board of Trustees (see the plan changes listed under the April 30 article below).

The bill also contains a provision requiring the executive directors of the three statewide retirement systems (Minnesota State Retirement System, the Public Employees Retirement Association, and TRA) to jointly conduct a study of defined benefit, defined contribution and other alternative retirement plans for Minnesota public employees.  The study shall include analysis of the feasibility, sustainability, financial impacts, and other design considerations of these retirement plans.  The report is due to the Legislature by June 1, 2011.

More information about the changes for TRA members and benefit recipients will be posted on the TRA web site within the next few weeks. In addition, the Spring/Summer edition of the TRA newsletter will arrive at members’ homes later in June.

If you have any questions, please call us at (651) 296-2409 or toll-free (800) 657-3669. You can also email TRA at: info.tra@state.mn.us

Support for Stability

A financial time bomb is ticking away — mostly unheard by taxpayers, government workers and retirees.

Years of off-the-mark investment assumptions, inadequate contributions and generous benefits have left government pension funds in a perilous situation: unable to meet longterm commitments to current and future retirees without major changes.

“It’s a serious problem,” said Sen. Don Betzold, DFL-Fridley, who is working on a plan to shore up the funds.

Minnesota’sretirementfunds and other investment accounts lost $10 billion over the past two years, leaving about $53 billion under state management at the end of 2009. The pension funds have been slightly above or below minimum balances recommended by the federal government.

Only 76 percent of the pension obligations for 636,000 teachers, state and local government employees and retirees were fully funded at the end of last June, leaving their pensions short $12 billion. One smaller local fund could go broke in as few as five years, meaning pension checks wouldn’t be cut, Betzold said.

To deal with the pension problem, legislators are proposing an unusual package of increased government payments, greater contributions from employees and reduced benefits for retirees. Bills in the House and Senate are expected to be acted on this session.

But funding for government pensions also depends heavily on investment returns, which were hammered by the recent stock market decline.

Making matters worse, Minnesota is among five states whose pension funding is based on expected average earnings of 8.5 percent a year, according to the nonprofit Pew Center on the States in a February study. Over the 20 years ending last July, which include the stock boom of the 1990s and the busts of recent years, the state’s return averaged 7.8 percent.

Other states have lowered their expectations to 8 percent or 7.77 percent.

“Some experts believe even those reduced rates are still unrealistically high,” the Pew Center wrote.

Lower the target?

Minnesota pension funds recently considered lowering the investment target, but that would have required even bigger contributions and bigger benefit cuts to meet commitments — both politically unpopular choices.

“They’re betting that going forward they get at least 8.5 percent,” said Edward Burek, deputy director of the Legislative Pension Commission.

Howard Bicker, executive director of the State Board of Investment, which oversees pension earnings, said pension funds in the state earned an average of 9.9 percent a year when taking in the past 30 years.

“History has told us we can do this over long periods of time,” Bicker said. “It’s the short term that you have got to have the staying power for.”

Betzold said the contribution increases and benefit reductions in his bill are needed “even if we get phenomenal returns.”

At a Senate hearing Wednesday, he said that without the proposed changes and at least 8.5 percent annual returns, “these funds are in big trouble. Some would go broke before … 30 years.”

The Teachers Retirement Association (TRA) is in the worst shape, with only 59 percent of its obligations covered. “They would run out of money by the year 2032” without the adjustments, Betzold said.

He acknowledged that the proposal to increase school contributions “is going to cause more stress on school budgets.”

School districts would eventually be paying $90 million more under the Betzold proposal, said Laurie Fiori Hacking, executive director of TRA.

The organization supports increasing payments from teachers and school districts and a suspension and temporary cut in benefits for retirees.

Legislators have complained that Education Minnesota, the state’s largest teachers union, has resisted having its members contribute more to their pension funds.

Education Minnesota President Tom Dooher said the union is willing to have employees pay more as long as school districts also pay more.

But former state Sen. Don Moe, long a critic of Minnesota government pensions, said years of generous benefits have taken their toll on fund balances.

“We’re dealing with hundreds of thousands of public employees, all of whom are, it seems, politically astute and active,” said Moe, a St. Paul DFLer who specialized in pension issues during his two decades in the Legislature. “It’s a very highly politicized system.”

In recent years Education Minnesota has even held out hope for benefit increases, “in spite of the crushing economic problems we have,” Moe said.

‘Insatiable demand’

Even though the pension funds are now calling for curbing benefit increases, Moe sees retirees and employees shifting gears with better investment returns.

“There is an insatiable demand for more benefits,” he said. “It’s difficult to resist in pension policy because you don’t have to pay the bill immediately.”

Retirement bonuses pegged to the stock market boom of the 1990s locked in obligations and helped increase debts when the market sagged and investment income declined, said a report by the nonpartisan Minnesota Taxpayers Association.

In addition to boosting school and teacher contributions and curbing teacher benefits, the proposed legislation would increase contributions by local government employees and 2,000 governments covered by the Public Employees Retirement Association. It also would cut their benefits and those for state workers covered under the Minnesota State Retirement System.

The pensions facing the most serious threat are those of the Minneapolis Employee Retirement Fund. It covers city employees who were hired before 1979, so it has about 5,000 people drawing pensions while about 100 are still working.

“It is expected to run out of money between five and seven years,” Betzold said.

The proposed legislation to save the pension would merge the Minneapolis fund with the larger Public Employees Retirement Association at an eventual cost to the state of $27 million a year.

Pat Doyle • 651-222-1210

Many private sector pension plans have taken a beating in these difficult economic times. Some companies have slashed current and future benefits, frozen employer contributions or dropped plans altogether, continuing a trend that started even before the economic downturn.

With private sector workers shouldering a greater responsibility for retirement savings, it’s not asking too much for Minnesota teachers and school districts to pay a little more to keep their pension fund financially healthy.

A legislative proposal to increase the contributions of school districts and teachers to the statewide retirement fund merits passage. The plan is an equitable way to shore up the pension pot and keep it viable in the future. Modifying the contributions now will ensure that retirement benefits will be available for the 77,000 educators who currently pay into the plan and were promised a modest retirement income as a condition of employment.

Without increased contributions, the fund is in trouble. As of last June, the Minnesota Teacher Retirement Association (TRA) had assets of about $17.8 billion, while liabilities to current and future retirees totaled $23 billion, leaving a $5.2 billion gap.

Fund managers project that without an infusion of new money, the fund will go broke by 2032. That would leave thousands of future retirees without the income they had paid to support during their careers.

The major feature in the legislation would increase both district and teacher contribution rates, which are currently 5.5 percent. Those rates would each rise by 0.5 of a percentage point annually over a four-year period up to 7.5 percent. For the average working educator making about $49,000 per year, that additional payment would be $172 in the first year and $686 in 2014. During the first year, the higher contributions would raise $40 million to $42 million for the TRA fund — half paid by teachers and the other half by school districts.

In addition, the bill would temporarily freeze benefit increases for the 50,000 educators who now receive pension checks. Under current law, retired teachers receive a 2.5 percent annual bump as a cost-of-living increase. Retirees would not get that increase in 2011 and 2012, costing them about $700 per year. In 2013, the raise would be lowered to 2 percent; when the fund is restored to at least a 90 percent level, the 2.5 percent would be reinstated.

Education Minnesota officials have raised concerns about the bill but say their position is more nuanced than flat-out opposition. Tom Dooher, president of the teachers union, said the organization is not necessarily opposed to raising pension contribution rates of teachers, but it wants assurances that educators won’t have to cover the entire pension shortfall if school districts fail to provide additional funding.

Raising contributions and withholding increases spreads the financial pain among the active teachers, school districts and retirees. And in future years, when the market and pension coffers are healthier, adjustments could be made to decrease the contributions.

During the go-go years in the stock market, the teacher pension fund was fully funded between 1997 and 2004. Times were so good that fund operators were able to decrease employee and employer contribution levels. But those rollbacks, combined with sharp market downturns after 9/11, in 2002, 2008 and 2009, depleted the fund.

The shared sacrifice approach outlined in the proposed legislation is a fair way to keep an important public pension plan solvent. Legislators should pass it to protect the current and future retirement incomes for tens of thousands of Minnesotans.

State and Local Government Operations:  Amended, passed, re-referred to Finance

House Status: 2/18/2010:

State and Local Government Operations hearing scheduled:
8:30 a.m., 200 State Office Bldg.

LCPR Action:   3/5/2010:

Passed as amended; forwarded to the House & Senate Gov Ops Committees
Amendment S2573-5A, reflecting the amendments recommended by the Commission

The modifications proposed are designed to either increase TRA revenue or decrease fund expenses, in effect, helping to stabilize TRA’s funding status.   As of June 30, 2009, the TRA Fund had a funding ratio of about 60 percent, using the fair market value measurement of assets.   TRA also had a contribution funding deficiency of 11.07 percent.   Mercer Consultants, TRA’s actuary, calculated that using current plan provisions and contribution rates, the TRA Fund assets would be exhausted in the year 2032.  The TRA Board spent many months developing plan modifications that would first and foremost stabilize the fund while improving TRA’s future funding health.

The following plan changes are proposed:

• Member and employer contribution rates, which are currently 5.5 percent, would each rise by 0.5 percent annually over a four-year period beginning July 1, 2011.  On July 1, 2014, the employee and employer rate would each be 7.5 percent.  A contribution rate stabilizer would be implemented that would allow further changes to the contribution rates if needed after 2014.
• A temporary two-year suspension of annual increases for benefit recipients would occur in calendar years 2011 and 2012.   Beginning January 1, 2013, annual increases would be lowered from the current 2.5 percent to 2.0 percent.   Upon reaching a market value funding ratio of 90 percent, the annual adjustment would be restored back to 2.5 percent.
• Members who leave teaching, but opt to receive a refund of their member contributions from TRA would receive a lower interest rate of 4 percent annually on their contributions beginning July 1, 2011.
• Retired members who have returned to teaching and have an Earnings Limitation Savings Account (ELSA) would receive no additional interest on their account balance beginning July 1, 2011.
• Teachers who are deferring receipt of their monthly annuity benefits would receive a lower interest rate of 2 percent on their deferred TRA benefits.   This change would affect deferred benefits after June 30, 2011.

On February 26, 2009, the LCPR heard an overview of TRA’s funding condition and highlights of the proposed legislation, which were presented by Laurie Hacking, TRA Executive Director.   The LCPR also received testimony from various TRA stakeholder groups representing members, employers, and retiree groups.   Stakeholders expressing support for the immediate need for TRA funding reform included the Retired Educators Association of Minnesota (REAM), Minnesota Association of School Administrators (MASA), InterFaculty Organization (IFO), Committee of 13 (Minneapolis retirees and active members), Minnesota Elementary School Principals Association (MESPA),  Minnesota Association of Secondary School Principals (MASSP), Minnesota School Boards Association (MSBA), Minnesota State College Faculty (MSCF) and Minnesota Rural Education Association (MREA).

The LCPR also heard testimony from representatives from Education Minnesota who were concerned that the employee contribution rate increases proposed were an excessive burden on active teachers who were already feeling the effects of frozen salaries and higher health insurance premiums.   Education Minnesota expressed concern about the inequities existing for TRA members first hired after June 30, 1989, who must teach until age 66 in order to receive unreduced retirement benefits and who do not qualify for the “Rule of 90” provision.

At the conclusion of the meeting, the TRA provisions in SF2499/HF2953 were amended into SF2573/HF2952, along with similar funding reforms sought by the Public Employees Retirement Association (PERA) and the Minnesota State Retirement System (MSRS).

At its March 5, 2009 meeting, the LCPR further heard testimony regarding SF2573/HF2952, the financial sustainability bills.   An amendment proposed by Representative Paul Thissen (DFL-Minneapolis) was considered.  Under this amendment, TRA employee and employer contribution rates would have increased 3 percent each (from 5.5 percent to 8.5 percent), phased-in over a six-year period.   TRA benefits would have improved through a higher formula multiplier (1.9 percent per year to 2.1 percent per year) for years of teaching service beginning July 1, 2011.  The benefit provision would have also provided unreduced retirement benefits to all members who attain the age of 62, with 30 years of service.   The amendment also contained authorization for school districts to levy for the cost of TRA retirement contributions.  The amendment was withdrawn by the author and a no vote was not taken for inclusion of the amendment into the pending bills.

Provisions to improve the funding health of the St. Paul Teachers Retirement Fund Association (SPTRFA) and the Duluth Teachers Retirement Fund Association (DTRFA) were also heard and included into SF2573/HF2952.  There are no proposals in the legislation to merge either SPTRFA or DTRFA with TRA.

The LCPR passed the bills on a voice vote.  SF2573/HF2952 will now be referred to the House and Senate Government Operations Committees.   In summary, the bills contain various contribution rate increases and benefit plan changes designed to stabilize and improve the funding conditions of the five largest public pension plans:   TRA, PERA, MSRS, SPTRFA, and DTRFA.

The full Legislature and the Governor must approve any proposed changes to TRA contribution rates and benefit provisions.   The 2010 session is scheduled to end on May 17.

Updates will be posted on the TRA web site (www.tra.state.mn.us) and the Legislative Commission on Pensions and Retirement’s web site:

Committee of Thirteen Pension Principles:

1. (Immediacy) Problems needs to be addressed this year or it will get worse.

2. (Shared Pain) The solution should involve all; retirees, actives and the employer and if possible the state.

3. Fairness to actives: Phase in contribution increases

4. Fairness to employer: Phase in contribution increases

5. Integrity of plan actives: No reduction in benefits for current actives

6. Integrity to plan retirees: No permanent reduction in retiree COLA. A one- or two-year freeze is an option that may be necessary but with a bounce-back provision to restore the COLA once funding is stabilized.

7. (Protect children) Provide some options for districts to cover employer share through an optional levy or eliminating the prior pension reduction to prevent harm to local education programs.