April18th LCPR meeting

The Legislative Commission on Pensions and Retirement (LCPR) met on Tuesday, and Minnesota Management and Budget (MMB) Commissioner Myron Frans testified regarding Gov. Mark Dayton’s recommendations (SF2233/HF2486). These recommendations contain measures endorsed by a Blue Ribbon Panel convened at the governor’s request earlier this year and included in the governor’s biennial budget.

For TRA, the bill calls for a 1 percent retiree cost-of-living adjustment for five years and 1.5 percent thereafter, as well as a 2 percent increase in employer contribution rates.  For MSRS, the bill calls for a reduction in the COLA from 2 percent to 1.5 percent.

Frans said bipartisan support is needed for pension reform. He was questioned about why the employer contribution rate increase for Teachers Retirement Association (TRA) was only funded for two years, and why St. Paul Teachers Retirement Fund Association (SPTRFA) does not receive its requested $5 million direct appropriation in the bill. Frans said MMB believes it cannot commit to these dollar amounts beyond two years.

Sen. Dave Senjem asked about how much the bill is going to cost and what funding ratio trajectory is projected for each of the funds over the next 30 years. With regard to the investment return assumption, Rep. Tim O’Driscoll said that it’s difficult for the State Board of Investment to target one rate for TRA and a different rate for the other systems. TRA has proposed moving to 8 percent while a data-driven study is conducted on best practices for setting the investment assumption. Frans and the blue-ribbon panel recommended 7.5 percent for all systems immediately (July 1, 2017).

Sen. Julie Rosen, commission chair, asked LCPR members whether it would be helpful to get actuarial costing on the governor’s proposal. Members agreed to proceed with a cost study. Separately, Deloitte actuary Michael DeLeon testified on actuarial studies on the retirement systems’ reported actuarial liabilities. Deloitte has only minor recommendations for the system actuaries for the fiscal year 2017 valuation work.

The Pension Commission is expected to meet again next Tuesday, April 25th but no agenda has been set for that meeting

Courtesy of Minnesota TRA Communications

LCPR considers several bills and hears testimony from Center of the American Experiment

March 22, 2017 – Last evening the Legislative Commission on Pensions and Retirement (LCPR) considered several pension bills and heard testimony from Kim Crockett with the Center of the American Experiment (CAE).
In a discussion about funding for the major pension bills, Rep. Paul Thissen (D-Minneapolis) asked LCPR Chair Sen. Julie Rosen (R-Vernon Center) whether the LCPR can act on the major pension bills this session since the recently-released House GOP and Senate GOP budget targets do not specify funding for pensions. Rosen responded that pensions are a priority and that “in the end, we will take care of pensions.”
Kim Crockett*, who is CAE’s Vice President, Senior Policy Fellow and General Counsel, made a presentation (available on LCPR website), “Keeping the Promise: Pensions 2017” and was accompanied by Ross Bowen, an actuary and Financial Advisor at Merrill Lynch Wealth Management, who helped CAE analyze the Minnesota pension system valuations.  In her testimony, Crockett pointed out that there are 630,000 public pension retirees, survivors or active public employees in Minnesota who are counting on their public pensions.  She said Minnesota has been making pension promises without paying for them and highlighted how the funding ratios of the systems have dropped from being fully funded in the early 2000s to being 77 percent funded by 2016, leaving a $17.8 billion shortfall.   She indicated that “Anyone in a DB right now, I want to see it fully funded.”
Crockett stated that current investment return assumptions are too high and understate the deficit. She provided estimates showing that the current $17.8 billion shortfall would be $31.6 billion if a 4.3 percent return is assumed and $44.2 billion if a 2 percent return is assumed.  Unfunded liabilities are crowding out other spending priorities, she said, and referenced a quote from Warren Buffett that calls pension costs a “gigantic financial tapeworm.” Crockett pointed out that contributions for the plans have been rising but those contributions “are not getting us out of the hole” and she added that the “market crash did not cause the pension problem as the funds would have you believe.”
Crockett proposed solutions: “fully fund the defined benefit plan for retirees and current employees,” and then close the plans in order to stop adding new liabilities.  Crockett recommended new employees be offered a defined contribution plan that she believes would be more appealing to younger employees.  With respect to COLAs, she indicated that they “eat away at the asset base” and are not provided by private sector pensions.  LCPR members had no follow-up questions of Crockett.
In action earlier in the hearing, LCPR approved a special individual bill (SF 1839) that would permit a Winona State University employee a second opportunity to elect TRA coverage with the costs of that coverage borne by the employee and Winona State.
The LCPR also heard legislation (SF 1864/HF 2390) affecting PERA-covered employees receiving workers compensation.  Under current law, an employee may elect to purchase service credit for a period during which the member is receiving workers compensation, but in order to receive credit, the employee must pay both employee and employer contributions on the compensation.  The bill would require employers to pay PERA contributions on workers compensation when the employee elects to pay contributions on such compensation.  The bill limits the purchase to up to one year.  The bill was laid over for possible consideration in the omnibus pension bill.
LCPR also considered a bill (HF 2236) that would grant a benefit increase to retirees and surviving spouses of certain local salaried police and fire relief associations that consolidated with PERA. The benefit increase would be funded by state aid to PERA.  The bill was laid over for possible consideration in the omnibus pension bill.

Laurie Fiori Hacking, Executive Director
Minnesota Teachers Retirement Association

* C of 13 editor’s note: Kim Crockett has consistently provided an absolute worst case interpretation on publicly held pension systems. Some of these border on “alternative fact.” The CAE has a clear interest in moving billions of public employee pension funds from State Board of Investment control into the hand of private investment industry hands–hands that keep a bit of every transaction.

This is life in the privatized pension lane

 It’s just about picking the right stocks. Right?

What does distributing risk look like? What do the fees actually cost over the 60 years between 25 and 85? Oh and then there’s the health savings account for you medical costs. Everyone will have to save for the average cost of medical care including end of life. Right? And there won’t be any downturns in investments ever again. Right?

Now let’s see how many dollars will it take 20 or 50 years from now? So I’ll need to save how much out of my checks? I don’t make that much yet. Shouldn’t my school district or university or the state have to pay this? Who benefits from my work, after all?

04MONEY-02-master768

Matthew Lesser, a Connecticut state representative, sponsored a bill that would require more disclosures on conflicts of interest by those who sell 403(b)-type retirement plans.

Credit Christopher Capozziello for The New York Times

Support the Minnesota TRA 2017 Pension Adjustment Plan. Protect your public employee pension. It’s part of your compensation for years of service to Minnesota’s children and families.

Pension commission hears staff presentation on benefit cut options

The Legislative Commission on Pensions and Retirement (LCPR) met Tuesday night to hear a staff presentation regarding possible benefit cut options in addition to the benefit reductions already proposed by the retirement systems. 

Commission chair Julie Rosen, R-Vernon Center, explained that the hearing would be a listening session and encouraged LCPR members to ask questions. Rosen explained that LCPR would begin to build the pension bill at upcoming March meetings. The next LCPR meeting is scheduled for Tues., March 7, at 5:30 p.m.

LCPR staff, Susan Lenczewski and Rachel Barth, reviewed the proposals made by MSRS, TRA and SPTRFA and described the financial status of the plans. Staff explained that Rosen and Rep. Tim O’Driscoll, R-Sartell, had asked them to develop benefit cut options in addition to those proposed by the plans. 

LCPR staff had originally developed a list of approximately 30 benefit cut options, but O’Driscoll and Rosen had narrowed down the list to about 14, which they described as being in a “research and report” mode. The benefit cut options that were described by staff included:

  • Lowering the retiree cost-of-living adjustment to 1 percent permanently.
  • Increasing early retirement penalties for members who retire before the normal retirement age of 66.
  • Increasing the normal retirement age from 66 to 67.
  • Increasing the minimum early retirement age from 55 to 57 or 62.
  • Lowering TRA’s current benefit formula multiplier from 1.9 percent to 1.7 percent for each year of service.
  • Delaying payment of the first full COLA until a retiree reaches the current normal retirement age of 66.
  • Eliminating or reducing the benefit increase (augmentation) mechanism now available for members who terminate public service and elect to leave their contributions with the pension system and delay receiving a benefit.

Commission members asked several questions about changing demographics and growing number of retirees relative to active members. There were also several questions about the complex mechanics of the augmentation or deferral mechanism. Some commission members asked for more explanation about how early retirement penalties work. There were also questions regarding how retiree health care costs are accounted for in the CPI and whether COLAs had been frozen in prior years.

Regarding the proposal to lower TRA’s benefit formula multiplier, some commission members recalled that TRA employee contributions were increased in 2006 to pay for this formula improvement. Some LCPR members expressed a desire for more consistency among the provisions of the statewide plans. Concerns were also expressed about the need to avoid reducing benefits for members close to retirement so that benefit promises are kept. The importance of pensions in the recruitment and retention of public employees was also mentioned.

Some commission members cited their concern that the systems were asking for $400 million in financial assistance “in perpetuity.”

Courtesy of Minn TRA Communications

Fordham Institute report on teacher pensions flawed, not credible

Last week, the Fordham Institute released a study that erroneously claims teachers in Minnesota and in most states would be better off investing retirement contributions on their own rather than receiving a TRA defined-benefit (DB) pension after a career of teaching. The study used flawed calculations and methodologies to arrive at this conclusion by very significantly underestimating the value of a TRA pension and overestimating an individual’s ability to earn high investment returns.

The study’s calculation of future pensions used outdated life expectancy data that predict far shorter life expectancies than Minnesota teachers experience and made other erroneous assumptions about likely retirement ages. These miscalculations shortened the projected pension payout period by 10 years. The study’s numbers also inflate the potential earnings an individual is likely to earn from investing their own contributions. Below is a detailed description of the problems and miscalculations found in the study.

Pension Accumulation/Payouts: The study

underestimates the value of the MN pension benefit for several reasons:

1. The study uses Centers for Disease Control (CDC) 2007 life expectancy tables, which predict far shorter life expectancies than MN-specific teacher mortality tables predict. For example, CDC tables predict an age 60 female will live to age 84 while TRA’s mortality tables predict they will live to age 90.2. CDC tables predict an age 65 female will live to age 84.9 while TRA’s tables predict age 90.3. Due to life expectancy errors alone, the study’s calculations shorten the likely pension payout by between 5 and 6 years.

2. The study assumes a teacher retires at the plan’s statutory normal retirement age, which in TRA’s case is age 66. In reality, TRA’s average retirement age is about age 62. By assuming a beginning payout age of 66, the study shortens the payout period by another four years. These years are excluded in the pension wealth accumulation part of the equation.

3. The study’s combined use of an overly advanced retirement age of 66 and wrong mortality tables results in a predicted payout period of 18 years to 19 years whereas using TRA-specific data results in a payout of over 28 years, a very material difference of over 10 years.

4. There are no references in the study indicating that the authors incorporate COLAs in the calculation of pension payouts.

Accumulated contributions plus interest: The study greatly

overestimates the value of the teacher’s theoretical cumulative contributions plus investment earnings by assuming individuals can invest and earn as much as large institutional investors. This is very optimistic and unrealistic. Here are the study’s flawed assumptions regarding potential investment earnings.

1. The study assumes the individual is capable of earning a very aggressive compound annual return, net of investment fees, of 8.5% in each year of the teacher’s entire working career.

2. According to the National Institute on Retirement Security (NIRS), Morningstar advises individuals making retirement plans to use an expected return on their investments of 5%.

3. Previous studies show that individuals tend to earn 1% to 2% less per year than institutional investors due to high investment fees, less skill than institutional investors, and no access to certain high-performing investment sectors such as private equity and venture capital.

4. Individuals investing their own assets must reduce their risk as they approach retirement age and move more retirement assets into lower-performing bonds and other fixed income investments. This was not taken into account in the study which assumed an 8.5% return each and every year through the age 66 retirement age. The current investment market climate shows how retirees near retirement are struggling to eke out very low single digit returns on bonds and fixed income investments.

Teachers highly value retirement plans as an extremely important job feature. The DB pensions that cover the vast majority of teachers address an essential retirement security need –

replacing income when one stops teaching. The DB pension adds value by assuring that teachers cannot exhaust their retirement savings and will not be hurt by investment losses and inflation. School systems use pensions to recruit, retain and manage the teaching workforce.

Defined contribution plans help teachers manage employment risk, making portability easier for teachers who leave. However, studies have shown that workers need to save more in a defined contribution plans to offset the lower returns in self-directed retirement accounts and make sure that retirement savings last for as long as a teacher will live. Teachers live much longer than average workers and, in TRA’s case are predominantly female. Three-fourths of TRA retirees are women.

Calculations for school districts conflict with results of more extensive analyses of alternative retirement plan designs done for teacher pension plans. Colorado Public Employees Retirement Association (COPERA) is an example of a system recently studied by the state’s auditor in an extensive 217-page analysis of typical teacher tenure patterns based on several plan design alternatives. In every situation, COPERA’s pension replaced a higher level of income than all of the alternative designs. For example, even a teacher who teaches for only three years would receive 40 percent more retirement income from COPERA than from investing the $6,700 refund and buying an annuity.

Courtesy of Communications Office

Teachers Retirement Association

Public Employees Retirement Association

Minnesota State Retirement System

 

Pension commission hears public testimony on TRA, St. Paul Teachers funding proposals

Teachers Retirement Association stakeholders testified Tues., Feb. 14, at the Legislative Commission on Pensions and Retirement (LCPR) regarding TRA’s board-approved 2017 financial proposal.

Eighth grade social studies teacher John Bartholow, who teaches at St. Michael-Albertville School East, said that he would question whether to remain in the profession if drastic changes are made to the TRA pension. He cited a Towers Watson study that found that young workers consider a defined-benefit pension an important factor in accepting a job and staying on the job. Teacher effectiveness improves with experience, Bartholow said, and the teacher shortage will worsen if pension benefits are cut.

LeMoyne Corgard of Anoka-Hennepin Education Minnesota said that the TRA pension is a staple of the teaching profession and that active teachers have contributed a substantial portion of their income to their pension. The TRA proposal is balanced and will help sustain the system, Corgard said.

Isle Public Schools social studies teacher Jennifer Ernest spoke about her experience as a young archaeologist who decided to work in a small community school teaching K-12 history, science and social studies. Despite the relatively low pay for teachers, she said she hopes to retire with a sound pension someday. She added that it’s difficult for small school districts with limited resources to absorb contribution increases without state aid.

Rodney Rowe of Education Minnesota testified that half of teachers leave the profession in the first five years, so good benefits are important. EdMN supports TRA proposal because it is balanced, he said.

Lonnie Duberstein, president of the Retired Educators Association of Minnesota, said he can’t ask his retiree members to support a permanent 1 percent COLA and pointed out that the proposed employer contribution increase would still leave Minnesota well below the national average. Duberstein testified about his decisions as a young teacher to remain in the profession despite higher-paying job opportunities.

Representing active and retired Minneapolis teachers, Louise Sundin of the Committee of 13 also testified in support of the delicate balance of the TRA legislative package. Sundin pointed out that 75 percent of active teachers in Minnesota are women, and a high percentage of those are single and heads of households. “Without our public pensions we will become your wards,” Sundin said, noting that the average TRA pension check is a modest $1,800 per month. Research shows that women are 80 percent more likely to become impoverished, she said.

Sundin said that active teachers took a four-year cut as part of the last pension bill because their contributions rose 2 percent. Starting salaries in the mid-$40,000 range make it hard to recruit young talent, especially with heavy burden of student debt, she said. Sundin asked LCPR to keep the normal retirement age at 66, saying that she has a friend who teaches kindergarten and “can’t get up from those little chairs.”

Joan Beaver, board member of Education Minnesota Retired, said that EdMN Retired supports TRA’s proposal and stressed that pensions provide an important economic boost to Minnesota communities. She said that two-thirds of retirees have borne benefit cuts and that benefits are not keeping pace with inflation. TRA’s proposed lower COLA translates into a reduction of about $573 a month, she said. Even so, retirees are willing to share in the sacrifice for the good of the fund, Beaver said.

REAM vice president Paul Ehrhard similarly testified that pensions are a key element in teacher recruitment/retention and that he can’t support a COLA that’s at “1 percent for infinity.”

Representatives of school districts and school boards also testified. Gary Amoroso, executive director of the Minnesota Association of School Administrators, said his group supports TRA’s proposal and added that the TRA board engaged employer groups in the deliberation process. He stressed that state funding to offset increased employer costs is important, especially because previous TRA contribution increases were absorbed by school districts. Amoroso pointed out that the governor’s pension proposal only funds the contribution increases for two years and additional funding will be needed in the third and fourth years.

Scott Croonquist, executive director of the Association of Metropolitan School Districts, said that his group worked with TRA and supports the state aid mechanism in the TRA bill. Croonquist explained that the school aid pension adjustment mechanism is efficient and equitable because it will reimburse districts for their actual increased costs.

Grace Keliher of the Minnesota School Boards Association backed up the testimony of Amoroso and Croonquist and credited Gov. Mark Dayton for recognizing the need to help school districts cover the increased pension costs. Keliher said she supports including a mechanism in TRA’s bill that covers the entire 2 percent employer increase.

Earlier in the evening, the LCPR heard testimony regarding the St. Paul Teachers Retirement Fund Association (SPTRFA) legislative proposal. Mike McCollor, vice president of the SPTRFA Board of Trustees, Mary Gilbert Dougherty of St. Paul Schools, and Brian Rice of the St. Paul Teachers Pension Political Action Committee testified in support of the St. Paul funding bill. Rice stated that it is wise and prudent to lower the investment return assumption to 7.5 percent based on action taken by other states, and that this will keep the system’s financing solid for the long term.

The pension commission approved non-controversial changes to pension system actuarial assumptions – some of which were requested last year. The 2016 administrative bill (SF545/HF565) will be the vehicle for other pension funding reform measures that may be approved by the commission later in the session, LCPR chair Julie Rosen said.

In closing, Rosen said that the process of evaluating the systems’ proposals is only beginning and that while it’s important for LCPR to hear concerns, stakeholders shouldn’t assume that the commission has a course of action already in mind.

Courtesy of Minnesota TRA Communications

LCPR hears testimony on investment assumption, Blue Ribbon Panel recommendations

The Legislative Commission on Pensions and Retirement (LCPR) held its first meeting Tues., Jan. 31, and elected Sen. Julie Rosen, R-Vernon Center, as chair and Rep. Tim O’Driscoll, R-Sartell, vice-chair. Sen. Sandy Pappas, D-St. Paul was elected secretary. Rosen said that it’s an honor to serve on the pension commission, which has a history of crafting pension legislation in a bipartisan manner.

The commission then heard testimony from Mansco Perry, executive director of the Minnesota State Board of Investment (SBI), Myron Frans, commissioner of Minnesota Management and Budget (MMB), LCPR staff, and representatives from the pension commission actuaries at Deloitte.

Perry reviewed SBI structure, investment strategies, asset allocation, and annual return history. He reported on investment consultants’ expectation of a 7.3 percent return for the next 10 years. Perry said that the expected return is just one element in developing an assumed rate of return on pension investments, and he observed that there has been a very significant drop in the assumed rate of return over a fairly short period of time. He said that it is inadvisable for the number to bounce around, and that the rate expected by investment consultants might increase in the future. There is a need to come up with a thoughtful way to determine the rate, Perry said.

Frans presented the recommendations of the governor’s Blue Ribbon Panel on Pensions, saying that the governor asked a panel of financial professionals to review pension plan proposals and provide advice on whether to include these reform proposals in his budget. Frans said the panel felt the 8 percent investment assumption is too high and should be reduced to 7.5 percent immediately to more accurately reflect plans’ potential unfunded liabilities.

The panel acknowledged that public pensions are important to thousands of Minnesotans and provide sound financial base for recipients and the state, Frans said. The panel also supports the shared sacrifice approach developed by pension system boards and believes that funding at the state level should be made available to help reduce unfunded liabilities. Frans said the panel suggests pursuing reform strategies in the future to manage COLAs and contribution levels.

Deloitte representatives said that lowering the return assumption lowers the risk of being unable to meet obligations, and said that a more conservative rate (7.5 percent) is preferable. Deloitte provided a letter to LCPR stating that 7.5 percent is reasonable and that they don’t recommend different rates across the pension systems.

The Deloitte actuaries also noted that Minnesota is above average in management of pension plans. Deloitte also noted that other states, employers generally pay twice as much as employees while in Minnesota the ratio is closer to 50/50.

Rosen said that Frans will return next week for additional testimony regarding pension finances.

Courtesy of Minnesota TRA