Gov. Mark Dayton on May 22 signed the 2015 Omnibus Retirement Bill into law. The bill passed in the state House of Representatives unanimously and in the Senate on a 53-4 vote on May 17 following days of wrangling over state funding for the merger of the Minneapolis Employees Retirement Fund (MERF) into the Public Employees Retirement Association (PERA).
Here are the law’s major provisions:
>· Interest rate, salary rate, and payroll growth actuarial assumption changes: For PERA, the Minnesota State Retirement System (MSRS), and St. Paul Teachers Retirement Fund Association (SPTRFA), the interest rate actuarial assumption is reduced to 8 percent, along with related reductions in salary and payroll growth assumptions. The Teachers Retirement Association (TRA) assumptions for interest rate, salary and payroll growth remain unchanged.
>· Post-retirement adjustment financial sustainability trigger: Revises the financial sustainability triggers for post-retirement adjustment mechanisms for MSRS, TRA and SPTRFA. Under current TRA law, the current 2.0 percent COLA would increase to 2.5 percent if TRA’s funded ratio exceeds 90 percent for two years in a row. This 90 percent funded ratio is not expected to be achieved until 2031. Should this higher 2.5 percent COLA be triggered for TRA, the proposal in the omnibus pension bill would require a reversion to a lower 2.0 percent COLA if TRA’s funded ratio dips below 80 percent in one year or 85 percent in two years. (PERA General already has this trigger mechanism.)
>· Contribution stabilizer: Revises the contribution stabilizer mechanisms for PERA, MSRS, and TRA boards by changing from a mandatory, virtually automatic, rate-setting procedure to an advisory procedure that will grant the boards flexibility to determine the amount of contribution rate increases or decreases required by each fund’s financial condition.
>· Changes in refund repayments and leave/prior service credit purchases related to interest assumption changes: For PERA, MSRS, and SPTRFA, the interest rate charged to members who repay refunds, purchase leaves, or purchase prior service credit is lowered to 8 percent for periods beginning after June 30, 2015. TRA’s interest rates are unchanged.
>· SPTRFA post-retirement adjustments: changes the fund’s post-retirement adjustment calculation by capping COLAs at 2.5 percent upon reaching 90 percent funding. Current law would allow a potentially higher COLA based on the Consumer Price Index up to 5 percent.
>· PERA, MSRS and TRA administrative bills and obsolete date revisions: Makes technical, noncontroversial changes and updates.
The interest rate assumption generated a fair amount of debate in hearings of the Legislative Commission on Pensions and Retirement (LCPR) earlier this year. TRA Executive Director Laurie Hacking testified that unlike MSRS, TRA has no need for an immediate change in the interest rate assumption to avoid paying a higher retiree COLA. And unlike PERA and MSRS, TRA would experience a significant negative financial impact if the rate were lowered to 8 percent. Lowering the rate would increase TRA’s liabilities by $1 billion and create a contribution deficiency of about 1.9 percent of covered payroll.
Hacking also said that the TRA board of trustees prefers to wait until a legislatively mandated experience study is completed this month. This will permit TRA to quantify the impact of all assumption changes and work with stakeholder groups to develop sustainability measures.
TRA stakeholders showed up in force at LCPR meetings 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 asset liability study. Among those who testified 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.
The LCPR often meets during the period when legislature is not in session. Among possible topics for discussion during the interim are the interest rate assumption and the feasibility of switching public employees from the current pension system to a 401(k)-type plan.