May 21, 2014 UPDATE: 2014 Omnibus Retirement Bill
Gov. Mark Dayton on Wednesday signed into law the Omnibus Retirement Bill (H.F. 1951) providing the St. Paul Teachers’ Retirement Fund Association State funding assistance of $7 Million annually beginning Oct. 1, 2015.
This aid will help address unfunded liabilities brought on by funding shortfalls from the State in years past. The bill also sets a fixed amortization date of 2042 for SPTRFA to achieve full funding, and clarifies membership eligibility requirements for future annual post-retirement benefits. The bill leaves SPTRFA as a separate Plan rather than merging it into the statewide Teachers Retirement Association (TRA), while authorizing the merger of the Duluth Teachers’ Retirement Fund Association(DTRFA) into TRA. Consolidation of DTRFA and TRA will move forward after the expected approval of the TRA and Duluth boards and the DTRFA membership.
Bill author Rep. Mary Murphy, D-Hermantown, said that the measure was “crafted in the spirit of good financial stewardship and accountability to stakeholders – current and future public retirees, local government and school district employers, and taxpayers.”
Senate bill sponsor Sen. Sandy Pappas, D-St. Paul, added: “This is really an attempt to make sure we have a strong, sustainable teacher retirement system for all teachers.”
Other significant reforms in this year’s bill include:
- Raising employee and employer contribution rates for the Public Employees Retirement Association (PERA) and Minnesota State Retirement System (MSRS). MSRS and PERA changes are being made with the intent that they will help put these plans on the path to achieve 100 percent funding.
- Spelling out the process by which cost of living adjustments are triggered when the three statewide plans reach 90 percent funding. The plans must be 90 percent funded two years in a row before COLA increases kick in. For TRA, if 90 percent funded, the COLA increases from 2 percent to 2.5 percent.
- Fixing the statutory joint and survivor optional annuity discount rate for all statewide plans, which will reduce system costs and administration.
Minnesota Teacher Fund Consolidation Study Issued
Read the study online: Full Report- Minnesota Teachers Consolidation Study
This report fulfills a mandate of legislation enacted in 2013 (Chapter 111, Article 13, Section 22) that required the boards and executive directors of the Duluth Teachers Retirement Fund Association (DTRFA), the St. Paul Teachers Retirement Fund Association (SPTRFA) and the Teachers Retirement Association (TRA) to jointly study and develop a report for the Legislative Commission on Pensions and Retirement (LCPR) on the feasibility and requirements necessary for consolidation of DTRFA and SPTRFA into TRA. This report includes detailed actuarial analysis, proposed cost allocations, implementation plans, asset investment management considerations, and education/communication plans.
LCPR Jan. 28-29 Meeting details
Legislative Commission on Pensions and Retirement (LCPR) held its introductory hearing in late January on the recently completed Consolidation Report which examined the merits related to a possible merger of the three separate MN teacher retirement systems. Executive Directors of the three plans, MN Teacher Retirement Association (TRA), Duluth Teachers (DTRFA) and St. Paul Teachers (SPTRFA), met from May through December compiling the report and securing input from the three Boards of Trustees as well as various plan stakeholders. The Boards of the three systems gave their final approvals of the Report in December 2013. The Report was filed with the LCPR on January 6.
The major conclusion in the report is that DTRFA will seek to merge with TRA, similar to the action taken in 2006 by the Minneapolis Teachers system now a part of the TRA while SPTRFA prefers, at this time and given known facts surrounding the proposed merger, to remain as a separate system and not merge with TRA. TRA’s Board recommends, among other stipulations, that any merging system have in place the financial structure to fully meet all current and future liabilities to avoid burdening TRA with those currently unfunded obligations. TRA’s Board also would prefer that no system be fully merged (administrative and investment functions) until July 1, 2015 and, if both Duluth and St. Paul were to merge, they should be with staggered entry to best insure the complete and seamless transition.
Legislative Actions Aimed at Improving the Long Term Financial Sustainability of the System:
Omnibus Pension Bill Clears House
Read the Bill: Omnibus Pension Bill 2013.
After some spirited debate, the House, by a large and bipartisan majority, 104 to 24, approved this year’s Omnibus Pension Bill (S.F 1088/H.F 1354). This follows the Senate’s favorable vote about three weeks ago.
For Saint Paul Teachers, the bill has some important features designed to continue the trend of the past few years aimed at preserving the sustainability of the Fund to continue to meet its present and future obligations. As you know, there are three primary areas where a pension plan is able to make adjustments to improve its funded position.
These include: a) earning more on its investments, b) reducing plan costs, and/or c) increasing income and contributions.
The major feature in the Bill adjusts the assumed investment rate of return. Minnesota systems have been at 8.5% (the highest discount rate in the country for over twenty years). With the Bill’s passage, that assumed rate will drop to 8% this July 1. The reduction in the rate was a compromise with advocates for an even more significant lowering and the State’s union leadership that wanted no change. The lowered discount rate will be carefully monitored over the next five-year period. If no action is taken to retain or lower the rate, the Bill calls for a spring back to the current 8.5% level. Few feel that is likely given the economic climate which is not expected to improve greatly in the near term.
For Saint Paul, the lowered discount rate translates into a slight lowering of the SPTRFA Plan’s funded ratio, from 70 to 68%. But the change better reflects the actual condition of the Fund in meeting its long-term liabilities. It also establishes a slightly more attainable level of investment return but does create a larger funding deficiency that will need to be addressed.
Another important and very positive piece of the Bill is that it will allow Saint Paul to operate its investment portfolio on the same level as the State Board of Investment. This expansion was the result of a several year study group, chaired by the State Auditor, to provide the State’s pension community with the tools needed to compete effectively in today’s changing markets. With the challenges facing the traditional investment scene, the opportunities to achieve more competitive rates of return have gradually expanded more into private markets, emerging global securities and inflation hedged vehicles, such as, inflation protected Treasury notes (TIPS), commodities, and higher yield bonds. With this year’s Pension Bill, the opportunity to take greater advantage of these “other” investment categories will be available for the Board’s prudent consideration.
One other feature of the Bill includes an annual reporting function that will provide for a full accounting of the fiscal status of each of the State’s pension plans in a common and comparative schedule. The expectation is that, while such information is already provided in each Plan’s Annual Report, this provision will be presented in a more accessible form.
All of these provisions made part of this year’s Pension Bill represent meaningful and constructive steps toward achieving sound retirement systems within Minnesota. With the upcoming elections this fall, it’s anybody’s guess as to the outcome and resultant impact on the composition of the Pension Commission. Under the balanced and effective leadership of Chairman Morrie Lanning (R-Moorhead), the Commission has moved methodically and ably through some very complex issues. Challenges lie ahead, including mounting pressure to consider adjustments to the fundamental nature of the State’s Defined Benefit Plan (DB) format. The Saint Paul Teachers’ Retirement Fund Association remains committed to preserving the existing DB structure and to considering further steps appropriate to improve the overall condition of, and benefits provided by, the Fund.
2011 Omnibus Pension Legislation
The bill (originally S.F. 1088/H.F. 1354 offered by Senator Sandy Pappas and Representative John Lesch) impacted all participants, active, inactive and retired members, of the System who were asked, over the past two years, to collectively share the burden necessary to further improve the Fund’s future long-term sustainability.
Key features of the 2011/2010 legislation included:
For retirees: the post-retirement benefit (COLA) is now set at a 1% increase per year, down from the 2% increase that was scheduled to become effective on January 2012 had the 2011 legislation not been approved. The COLA will be linked to the funded ratio of the Plan, which now stands at approximately 70%. When the funded status attains 80%, the annual COLA would return to the 2% level, until the Fund achieves 90% funded status. At that time, the COLA would link to the Social Security established level of increase, not to exceed 5% in any one year.
For inactive members: the annual credit for deferred retirement benefits, (i.e augmentation) for those inactive members over age 55, will be reduced, prospectively beginning July 1, 2012, from 5% to 2% annually. A lowered deferred augmentation rate to 2.5% had already been put into effect for post June 30, 2006 hires. That rate will be lowered to 2% prospectively. For all inactive members, under age 55, hired prior to 2006, their augmentation rate, previously 3%/year, will be set at 2% prospectively. In summary, the newly credited rate of 2% annually will apply prospectively to all deferred benefit recipients, regardless of current age or time of commencement of service with the Saint Paul School District.
Other benefit changes aimed at improving the long-term stability of the Fund included a lowering of the annual interest rate credited on refunds for former active and inactive members from 6% to 4% beginning this July, 2012. The other adjustment in the 2011 legislation involved the canceling of interest credited for re-employed annuitant savings accounts for recipients under age 65 that return to service with the Saint Paul School District and earn greater than $46,000/year.
In the earlier year’s Legislative Session, 2010, as a component of this shared financial burden, an increase for all active members of ¼ of 1% on both the Employer and Employee contribution rates was approved. It took effect with all paychecks beginning on July 1, 2011. The increased contribution rate grows at ¼ of 1% annually for the next three years, until a total of a 1% increase is realized. During the first six months, through December 2011, the Fund had received approximately $500,000 in additional contributions as a result of the added ¼ of 1 % of payroll from employees and employer.
These across-the-board changes, collectively impacting actives, in-actives and retirees, will make major strides in helping to save the System over $100 million in reduced long-term liabilities with concomitant positive impacts on the Plan’s funded status some of which are being felt within this first year of enactment.