Pension commission wraps up 2013

The Legislative Commission on Pensions and Retirement (LCPR) held a two-day discussion on retiree cost-of-living adjustments, the 2011 Retirement Plan Design Study, and a bill to expand the Public Employee Retirement Association (PERA) Correctional plan to include 911 operators, probation officers and Hennepin County security guards.

The executive directors of PERA, Teachers Retirement Association and Minnesota State Retirement System gave a presentation updating the commission on system finances and summarizing the findings of the 2011 Retirement Plan Design Study. Among the key findings was the $2.76 billion in transition costs that would be caused by switching from a defined-benefit pension plan for public employees to a defined contribution or 401(k)-type plan.

Kim Crockett of the Center of the American Experiment testified on both the COLA and plan design issues, telling commission members that “if you’re going to have a defined-benefit plan, fund it.” She also said that she wants to be a “resource and not just a critic” for the commission, and offered to rewrite LCPR principles for them.

Crockett and some members of the commission pointed out that when times are good and plans are well-funded, Minnesota can’t do what it did in the 1990s and offer benefit enhancements and increased COLAs, neglecting to pocket savings for down cycles. Crockett warned that the well-funded PERA Corrections plan could find itself in a “yo-yo situation” where the plan hits 90 percent, starts paying out more in COLAs, and the funding ratio drops again.

Crockett said that the 2011 Retirement Plan Design Study has been criticized by 401(k)- proponent organizations such as the Laura and John Arnold Foundation and the Manhattan Institute. She disputed the numbers in the study and said there were problems with the approach taken by Mercer, the systems’ actuary for the study.

Sen. Julie Rosen, R-Fairmount, said she was “offended” at the idea that a national group with no direct experience with Minnesota’s pension funds would claim Minnesota’s information is wrong. Rosen asked Crockett how she would suggest paying for the $2.76 in costs to transition to a DC.

“That’s an inaccurate estimate of what it would cost,” Crockett said. “You don’t have to close off your funding source when you close a DB. … According to this and several other very smart foundations … Mercer confused reporting requirements with funding policy.”

Dave Bergstrom of MSRS and actuary Bonnie Wurst, formerly of Mercer, corrected the record to say that the study was accurate and conducted according to best actuarial practices. “The unfunded liability has to be paid off,” Bergstrom said. “If you close the plan, they have to be paid. There is an argument about how you pay them.” You can inject a massive amount of money and invest it to pay down liabilities, or you can pay as you go – which would be the most expensive way, he said.

Crockett argued that Minnesota should move from a defined benefit system toward a defined contribution system. “We cannot rely too heavily on kicking the can down the road because then you’re shifting the costs of employees unfairly onto the next generation,” she said. The transition cost roadblock is “not what we thought it was,” and lawmakers should be “encouraged by the fact that other states are doing this,” Crockett said. “If they can do it, why can’t Minnesota?”

Rep. Tim O’Driscoll, R-Sartell, said it’s time to shift some of the state’s pension risk into the private sector and offer more portability and flexibility for state workers’ retirement plans.

Sen. Alice Johnson, D-Spring Lake Park, noted that pensions are part of the contract the state makes with public employees, but lawmakers need to look at pension financing much like they would with any budget problem: either cut expenses or increase income. Johnson suggested looking at both.

Curt Hutchens and John Fisher of the Retired Educators Association of Minnesota (REAM) testified regarding the positive economic impact of retiree spending on Minnesota’s economy and described how maintaining TRA’s higher contribution rates of the 1990s would have helped cushion TRA’s finances during the 2000s.

Lobbyist and attorney Brian Rice testified on the importance of defined benefit pension plans for public safety workers not covered by Social Security. Rice said you can’t ask public safety workers to rely on a defined contribution plan. If a young officer dies in the line of duty, “you can’t ask the surviving spouse and children to survive on a couple hundred dollars in a defined contribution plan.” 

Rice mentioned that Minnesota’s contribution rates are significantly lower than other states, according to the National Association of State Retirement Administrators (NASRA). According to NASRA, employer (taxpayer) contributions are 2.8 percent of state and local government spending in other states; 1.6 percent in Minnesota.

Rice also disputed Crockett’s comments about the Moody’s ratings agency’s outlook on Minnesota pension obligations. He noted that Minnesota ranks very favorably under Moody’s new methodology. Rice concluded by discussing the “huge success story” of last year’s session: the shoring up of the PERA Police & Fire fund through contribution increases and benefit cuts.

In his summary of memos on retiree COLAs, LCPR staff member Ed Burek noted that benefits at retirement should be “adequate and affordable.” He said that adequacy is a “fuzzy concept,” and the LCPR has never pinned down what it means. The staff memos detailed dollars needed to maintain purchasing power in various inflation rate scenarios, and charted how purchasing power decreases without COLA increases. Burek noted that Minnesota’s plans are unlikely to match inflation into the future.

On Thursday, Burek discussed the approaches some other states are taking to COLAs, including Wisconsin’s investment return-linked COLA, Iowa’s capped inflation adjustment, and South Dakota’s minimum adjustment.

The commission doesn’t meet again until Jan. 28.

Courtesy of Susan Barbieri,
Minnesota TRA Communications Director


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