The Legislative Commission on Pensions and Retirement (LCPR), chaired by Rep. Tim O’Driscoll (R-Sartell), devoted the Tues., March 3, meeting to hearing testimony on three bills that address the investment return assumption, a contribution stabilizer proposal, and a self-correcting COLA mechanism.
Representatives of three public funds – Minnesota State Retirement System (MSRS), Public Employees Retirement Association (PERA) and St. Paul Teachers Retirement Fund Association (SPTRFA) – spoke in support of lowering the investment return assumption from the current “select and ultimate” rate to 8 percent (HF660/SF613). Legislation passed in 2012 directed the state’s public pension funds to use a “select” rate of 8 percent for five years and an “ultimate” rate of 8.5 percent after 2017.
Laurie Hacking, executive director of the Teachers Retirement Association (TRA) testified that TRA supports the investment return bill as originally written, omitting TRA. An amendment had been drafted to include TRA in the bill, but was not considered. Rep. Paul Thissen, D-Minneapolis, moved other amendments clarifying TRA’s exclusion from the bill.
Dave Bergstrom, executive director of MSRS, said that the investment return assumption is the “most important and powerful assumption” used to value pension fund assets and liabilities. He noted that the rate has not actually been 8 percent for the past two years, because actuaries must “blend” the rate for the five year period. The rate started at 8.35 percent and will ramp up to 8.5 percent, Bergstrom said.
Bergstrom added that MSRS’ actuary recommended a rate between 7 percent and 8 percent. He said that MSRS is pursuing the legislation to lower the investment return assumption to avoid paying a higher (2.5 percent) COLA to retirees and avoid having to return to the LCPR to ask for contribution rate increases.
Jill Schurtz, executive director of SPTRFA, also spoke in support of lowering the rate. She said that although moving to 8 percent would hurt the SPTRFA’s funding ratio initially – lowering it to about 64 percent – it is a more accurate assumption and should be the primary driver for determining the fund’s financial status.
Hacking testified that unlike MSRS, TRA has no need for an immediate change in the investment return assumption to avoid a higher COLA. Also unlike MSRS, TRA would experience a significant negative financial impact if the rate were lowered to 8 percent, increasing liabilities by $1 billion and producing a contribution deficiency of about 1.9 percent of covered payroll. She said that TRA administration and board of trustees prefer to wait until an experience study, mandated by law, is completed this year. This will permit TRA to quantify the impact of all assumption changes and work with its stakeholder groups to develop sustainability measures.
Sen. Sandy Pappas, D-St. Paul, asked whether TRA will have to change its COLA if the investment return assumption were lowered. Hacking said that TRA would need time to work with all stakeholders on how to offset the negative effects of a lower investment assumption.
TRA stakeholders showed up in force to testify about the investment return assumption and urge the panel to wait for TRA’s experience study and a planned State Board of Investment (SBI) asset liability study. Among those who testified in support of the bill as originally written (without TRA) were members of the Retired Educators Association of Minnesota (REAM), Minneapolis’ Committee of 13, Education Minnesota Retired, the Minnesota School Boards Association (MSBA), Education Minnesota, and the Minnesota Association of School Administrators (MASA). The American Federation of State, County & Municipal Employees (AFSCME) testified in support of the bill lowering the investment assumption for PERA and MSRS.
LCPR director Larry Martin reviewed HF566/SF518, which would change the contribution stabilizer law from mandatory to a recommendation. The proposal would provide the MSRS, TRA and PERA boards with more flexibility and authority to set contribution rates; the LCPR would still have the final say
During the contribution rate discussion, Martin explained the difference between market value of assets and actuarial value of assets, and recommended that the commission consider replacing the five-year smoothing method (actuarial value) with market value.
Keith Carlson, lobbyist for Minnesota counties, testified in support of HF566/SF518, noting that PERA was forced to increase employee and employer contribution rates by 0.25 percent. Mark Haveman of the Center for Fiscal Excellence also spoke in support of granting more flexibility and authority on setting contribution rates, saying that the move would help neutralize the politics around contribution rates. Haveman said that contribution rate reductions should only occur when justified by funded ratios.
Haveman also testified in favor of using a “risk free” investment assumption rate (4 to 5 percent). He added that if Minnesota does not use market value to evaluate the funds’ health, then funded ratios need to be the standard before any contribution rates are lowered.
The bill proposing a “self-correcting” COLA (HF565/SF519) was also heard, and each of the public fund directors spoke in favor of the proposal. All three bills (investment assumption, contribution stabilizer and self-correcting COLA) were laid over with the intent to include them in the omnibus pension bill, which would be voted on at a later date by the LCPR.
Next Tuesday’s meeting will focus on the PERA fire relief associations.