Legislative Commission on Pensions and Retirement (LCPR) interim session, Wed., Aug. 28 meeting

The Legislative Commission on Pensions and Retirement (LCPR) gaveled in its interim session on Wed., Aug. 28 for discussions on retiree cost-of-living adjustments (COLAs), the pension plans’ investment return assumption, and PERA’s minimum salary requirement.

On Wednesday, LCPR staff Ed Burek reviewed the commission’s and the statewide plans’ historical actions regarding COLAs, and provided information on the various COLAs currently in effect for each of the statewide plans. Burek opined that the plans devised their COLAs without much input from the commission and noted the lack of uniformity across plans.

Rep. Mike Benson said that when the funds aren’t available, the plans shouldn’t be paying retiree adjustments. He suggested that consolidating the various plans into similar entities (all public safety in one plan, for example) would make it easier to make the COLAs consistent, and said that once the plans are consistent the state might want to look at a hybrid or defined-contribution retirement plan if there is “the political will to do it.”

Sen. Mary Murphy cautioned that although the staff memo used the word “inconsistencies,” that doesn’t mean the differing COLAs are inappropriate.

“We have to be able to afford the benefits,” testified Dave Bergstrom of the Minnesota State Retirement System (MSRS). Bergstrom noted that in 2009 the LCPR, the retirement systems, and pension plan stakeholders came up with a shared approach to make serious cuts resulting in savings of $6 billion to the plans. Those changes took a lot of courage, he said, and the systems’ contribution deficiencies have shrunk.

As for uniformity in COLAs, Bergstrom said the retirement systems came up with proposals that would fit the plans. “One size fits all doesn’t necessarily work,” he said.

Laurie Hacking of Teachers Retirement Association (TRA) added that there was an active debate at the LCPR regarding COLAs and the reasons why TRA froze the adjustments before returning to a 2 percent COLA in January. TRA froze adjustments because it has a heavy retiree load, whereas PERA and MSRS don’t have the same concerns. “We are in different financial positions. That’s why we have the different COLAs,” Hacking said.

Mary Vanek of the Public Employees Retirement Association (PERA) said that there were very difficult discussions with the PERA board of trustees in 2009 regarding retiree COLAs and the fiduciary responsibility to active and retired members. “The changes you supported have put us in a better place,” Vanek said.

In public testimony, Kim Crockett of the Center of the American Experiment said that in the private sector, most retirement plans do not have a COLA. “That is not something the majority of Americans enjoy,” she said. “There isn’t anyone looking out for them, there is no guarantee.”

On Thursday, the topic turned to the investment return assumption, a powerful mechanism that affects funding of the plans and managing liabilities. State economist Laura Kalambokidis testified about U.S. economic growth and pension plans’ investment return assumptions. She noted that getting the investment return assumption (sometimes called the “discount rate”) wrong can have consequences. If it’s too low, that can overstate liabilities and create unnecessary costs in the present. If it’s too high, that can understate liabilities and push costs to the future.

Kalambokidis said that uncertainty about near-tern economic performance suggests caution about raising the assumed rate of return. However, when pressed by Sen. Dave Thompson and Rep. Tim O’Driscoll, she was unwilling to say whether the present rate – 8 percent until 2017, 8.5 percent thereafter – is too high.
Thompson asked Kalambokidis whether the state would have to be in riskier investments if the rate were raised; she said the rate should reflect the risk of those future obligations as stated in present value.

Howard Bicker, executive director of the State Board of Investment (SBI) testified on the state’s asset allocation, investment performance, and long-term market expectations. He fielded a few questions about hyper-inflation, risk, and the appropriateness of the present return assumption.

“If we were to move it down to 6.5, 7 percent, does that make your job easier and flatten out unpredictability?” asked O’Driscoll.

“If you go to zero, my job is easy,” Bicker said. “But it’s not the goal to make my job easy. … Eight, 8.5 percent is probably as high as we can push it.”

Becky Gratsinger, chief executive officer of RVKuhns & Associates, which handles investments for the St. Paul Teachers Retirement Fund Association, testified regarding public fund long-term investment performance and asset allocation. When questioned about market volatility and general economic unpredictability, Gratsinger said that 8 percent returns are quite achievable.

Don Leathers of Retired Educators Association of Minnesota testified in support of “staying the course” with the present “select and ultimate” investment assumption and said that the strengthening stock market has helped the state pension funds rebound. Funding has improved and the plans are “making good headway,” he said.

Crockett of the Center of the American Experiment urged the LCPR not to just look at the SBI “snapshot in time,” but look at whether the benefits being paid out are appropriate for what the state has to spend. “By leaving [the investment assumption] at 8, 8.5 percent, you are choosing to shift the pain primarily to future generations.”

The day’s discussion ended with testimony by PERA’s Vanek regarding proposals to change PERA’s minimum salary threshold.

courtesy of Susan Barbieri, Communications Director, Minnesota TRA

Minnesota pension systems respond to Center of the American Experiment blog

Reprinted from Minnesota Teacher Retirement Association release

Opponents of defined-benefit pensions are having a field day with the news out of Detroit. Though that city’s financial woes have much more to do with lack of a diversified economy, stark population and demographic challenges and mismanagement at city hall, public-pension foes nationwide are trying to argue that pensions sank Detroit and will sink other cities, too.

 Kim Crockett of the Center of the American Experiment (http://www.americanexperiment.org/) is only the latest voice in a well-orchestrated effort to misrepresent the role of pensions in state and local government financial management. On her blog, she claims that Minnesota taxpayers will pay higher borrowing costs because of pension debt, and she cites Moody’s slight downgrade of Minneapolis’ credit rating. Moody’s signaled last year that it was going to take an approach to pension liabilities that would result in downgrades for cities nationwide. 

Here’s what the ratings agencies said about Minnesota’s pensions in their August 2012 ratings of our state’s general obligation bonds:

  • Fitch: “Pension funding is adequate, and in the 2010 session the state passed pension reform that increased employee contributions and reduced benefits, affecting both current employees and retirees. … The burden of net tax-supported debt and adjusted unfunded pension obligations as a percentage of personal income is well below the median for U.S. states.” (Fitch Ratings, 8/2/2012)
  • Moody’s referred to Minnesota’s “relatively well-funded pension system” as one of the state’s five “credit strengths.” (Moody’s Investors Services, 8/3/2012)
  • Standard & Poor’s Ratings Services: “Minnesota’s pension plans are reasonably well funded relative to those of other states and there have been significant reform measures implemented in the past couple of years aimed at lowering the liabilities. … Litigation relating to these changes was resolved in favor of the state and we would expect these changes to improve funded ratios over time.” (S&P Ratings Services, 8/3/2012)

Ms. Crockett repeatedly charges that “accounting tricks” are being used to “obscure the size of the pension problem” and hide “the pension crisis from public view.” Information on the financial status of Minnesota’s public pensions is readily available to the public. Each of the three statewide funds must issue a Comprehensive Annual Financial Report every January, provide financial status updates to the legislature in open meetings at least once a year, and disclose annual actuarial valuation reports – among other financial documents. 

The problem for Ms. Crockett is that the facts don’t support her “pension crisis” storyline – therefore, someone must be hiding something. So she is urging voters to pressure Minnesota’s elected officials and convince them that there is a Detroit-style crisis where none exists.