Omnibus Pension Bill’s Amendment – Update on the Consolidation Study

Update on the Omnibus Pension Bill 2013 – MNTRA, DTRFA, & SPTRFA Consolidation Study

JULY 17, 2013 – Much of the SPTRFA staff’s attention this summer has been focused in two areas, finalizing details ahead of the planned implementation of SPTRFA’s new Pension Administration System (which will bring significant efficiency servicing our Plan members) and working on the legislatively mandated “Consolidation Study”.  A final report with recommendations is due in early January. The Study was included in a late amendment to the Omnibus Pension Bill, during this last session, and called for the Directors of the State’s three teacher systems (MN TRA, Duluth and Saint Paul) to examine the merits of merging the three systems.

The examination of merging systems with the resultant economies of scale is not a particularly new topic.  However, the fact that rising financial pressures for addressing the various Plans’ unfunded liabilities and the Governor’s involvement in calling for the amendment have placed greater likelihood that this much analyzed topic may be becoming a greater likelihood.  A further source of impetus is that the Duluth Teachers Board (DTRFA) is facing a very difficult set of demographics  (declining active teacher work force, a higher number of retirees than active members, etc.) and has indicated its desire to merge with the State’s TRA.  Our Board has gone on record, initially, of preferring to remain an independent pension plan.  During this past Legislative session, actuarial studies, done for SPTRFA, had indicated that a merger option would be less cost effective to the State than remaining independent.

The work of the study group is just getting started.  There is a great deal of interaction anticipated with various associated groups including Board members, active and retired members, legislators, and so forth.  At present, we are looking at preparing comparative data on the three systems and have engaged the systems’ actuaries to undertake updated financial assessments, including a review of longer term liabilities.  Any merger will have to include a plan to address deficiencies in funding in order to avoid merely shifting one System’s obligations to another.

Four primary options for the Board’s to explore and consider are likely to include:

1) A full consolidation in which both a system’s investment and administrative functions would become merged into the State’s TRA and Board of Investment (SBI) operations;

2) A phased consolidation, whereby the system would be fully merged, but in two steps, where the investment assets would transfer initially with the structurally more complex administrative functions being combined with TRA possibly a year or so later when all preparations for such seamless transfer have taken place;

3) A partial consolidation with a full and permanent transfer of the investment assets to the SBI but the Plan’s administrative role would not merge but remain as an independent operating retirement system, not dissimilar to the structure of MN PERA, MN MSRS and TRA in which each entity is independent and serves as a Retirement Board for its members but is not responsible for the investment of the fund assets which part of combined State managed investment funds; and

4) Maintain the “status quo” where the Board continues to function independently, as present, serving as a retirement board and including responsibility for the investment of Plan assets.

During the summer, it is expected that both the Duluth and Saint Paul boards will discuss and offer their option preference to the TRA’s Board for its review and comment.  TRA’s Board will respond with any criteria and a possible timetable and process to follow to insure any merger will be effectively handled and so advise the respective Board(s).  Final consideration and the incorporation of the Boards’ respective merger preferences, including all accompanying financial and operational considerations and analysis, will be noted by year end with a report prepared for the Legislature’s Commission on Pensions and Retirement filed on or before January 6, 2014.

A key component to any planned merger of one or both systems will be a resolution of the financial issues that are involved with any combination.  During the past Legislative session, both SPTRFA and Duluth requested an additional State aid supplement to assist with addressing past underfunding and any remaining deficiencies.  The Systems had asked for the aid payments to extend for the next 25 year period, which would have effectively addressed those remaining deficiencies not solved by planned contribution increases and operational savings.  However, the State only provided the requested new aid for the next two years, during which the merits of consolidation of the systems would be examined.

This past fiscal year, Saint Paul’s investment assets grew by nearly 14%, which was well above the annual target 8%.  The long term annualized return for Saint Paul remains above 9%. This is an important element in the Fund’s long term diversified strategy to reduce its liabilities. If it remains an independent Plan or if it should merge into TRA, the continued improvement of its financial base is a critical goal and will continue to demand the Board’s fullest attention.

205.6 Sec. 22. CONSOLIDATION STUDY. PAGE R224
The boards and executive directors of the Duluth Teachers Retirement Fund Association, the St. Paul Teachers Retirement Fund Association, and the Teachers Retirement Association shall jointly study and develop a report on the feasibility and requirements necessary for the consolidation of the Duluth Teachers Retirement Fund Association and the St. Paul Teachers Retirement Fund Association into the Teachers Retirement Association. The report shall include detailed actuarial analysis that will define the financial requirements for consolidating with the Teachers Retirement Association in a manner, consistent with past practice, that assures that the assets of the Teachers Retirement Association are protected, that the merging funds are fully funded, and that the Teachers Retirement Association is not subsidizing the merged funds. The report shall include implementation plans, proposed allocation of costs between the state and all interested parties, time frames sufficient for an orderly transition, necessary management and administrative changes, asset investment related considerations, and education and communication plans to fully inform the executive branch, the legislative branch, and all system stakeholders of financial requirements. The report shall include plans to treat the employees of the Duluth Teachers Retirement Fund Association and the St. Paul Teachers Retirement Fund Association in a manner comparable to that provided to the former employees of the former Minneapolis Teachers Retirement Fund Association upon consolidation into the Teachers Retirement Fund Association. The boards and executive directors shall consult with the executive director of the State Board of Investment on investment management transition issues. The report must be submitted to the Legislative Commission on Pensions and Retirement by January 6, 2014.