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