2018 Sustainability Bill Passes Out of Pension Commission

The Legislative Commission on Pensions and Retirement (LCPR) on Tues., March 13, passed the 2018 omnibus pension bill. The next stop for the bill is the Senate State Government Finance Committee, which will hear it on Thurs., March 15, at 1 p.m. in Room 1200 of the Minnesota Senate Building.
The bill includes sustainability measures for all four public pension systems: the Teachers Retirement Association (TRA), the Public Employees Retirement Association (PERA), the Minnesota State Retirement System (MSRS), and the St. Paul Teachers Retirement Fund Association (SPTRFA).
Details on the bill, currently moving as SF 2620 (Senate version)/ HF 3353 (House version), may be viewed on the State Legislature website.
Minnesota Management and Budget Commissioner Myron Frans told commission members that Gov. Mark Dayton endorses the pension bill in its current form and will include the funds in his supplemental budget. Frans said the bill is a “very important sustainability package” that has been several years in the making and includes measures to improve the financial health of the pension funds and the state.
The bill reduces liabilities by about $3.4 million immediately, lowers the rate of return on investments to a “reasonable” 7.5 percent, puts the plans on the path to full funding, provides funding to schools to offset increased pension contributions, ensures that unfunded liabilities won’t weigh down bond ratings, and safeguards the retirement security of public employees for the future, Frans said.

* COLA: 1.0% for 5 years (2019-2023), then increase by 0.1% per year in each of next five years (2024-2028) to 1.5%
* COLA delay to age 66  (effective 7/1/2024) (exempt: Rule of 90, disability, survivors, age 62/30 years)
* Early retirement: Increase penalties, 5-year phase-in (fiscal years 2020-2024), age 62/30 years exempt
* Employee contribution increase: +0.25% beginning in FY2024 (7.5% to 7.75%)
* Employer contribution increases: +1.25% phased in over 6 years, FY19-24 (7.5% to 8.75%)


Where Will the Money for Your Pension Come From?

What is a pension?

A pension is what you get upon retirement to live on with some dignity. Most of us understand the Social Security benefit as a partial pension; that is it was meant to help the elderly and disabled survive outside the poor house, a place more like a prison than a retirement or nursing home. Big businesses often provided a real pension for employees to honor their years of service and live in relative comfort in retirement. That was more often the case when a “job for life” was the framework for a middle class of workers in a successful economy. Two things changed that framework: job mobility and greed.

Laissez faire government of the economy at the end of the end of the 19th century allowed a few to become very rich—the robber barons. However a burgeoning middle class of managers also rose and began to demonstrate the underside of the capitalist competitive spirit. While the corporations competed for more of the market, the new middle class competed for more of the money being moved around—bigger houses, motor cars and eventually stock holdings. Meanwhile labor workers were experiencing more company debt rather than rising wages, leading to a labor revolt and the rise of unions. Everyone was coping with the changes that were taking place 100 years ago, yet, everyone seemed to see the solution to these situations in terms of more dollars.

The stock market crash, the following depression and the great drought put the brakes on the flow of dollars however, and of course these events hurt those with access to the fewest dollars the most. The scales were now marked, however; life was all about how many dollars one had. So Social Security came into existence to provide “life” for those hard hit in old age. Life was still valued in dollars however, and more was definitely better.

Following the World War II, the three earner sectors emerged to resume their pursuit of the dollar: the fat cats, who had retained vast sums over the course of the depression and then profited from the war; the professional and management classes, who thrived in the war industry’s enormous growth; and the union workers, many of them soldiers, sailors and fliers returning from combat, now manning factory positions, displacing women and negotiating for pensions more lucrative than Social Security.

These three sectors have been competing for dollars ever since. Greed has been sanctioned in all sectors and has led to unethical and even criminal activity to profit on the labor of others. Only one sector actually creates new wealth however, the workers. The other sectors have always used that created wealth as their source of dollars. Hence, any process that holds money in a lower economic sector becomes the target for the sector or sectors above. Those targets include wages earned, pension funds held and taxes used to pay for public services and infrastructure.


So what about our pensions?

Because we are public employees, our pensions all originate in taxes: income and sales taxes, property taxes, and various transactional fees. It is public money, paid for infrastructure and social services available to all, often without cost to the user, rich or poor, and collected from everyone, more or less. There are indeed billions of dollars paid in taxes and used publicly which are unavailable for private wealth in theory and in law. However, public money is not the only or the largest part of the pensions we do or will collect.

Just as businesses did when they still valued their life-long workers, money is invested from day-one on the job until the last check at retirement, over 20 or 30 years or more. Generally some of that investment comes from a percentage paid from the employee’s paycheck, and, nationally on average, more comes from a percentage paid by the employer. While wages may have risen considerably over that time, the value of the day-one investment, enjoying as many as thirty or more years of growth, may actually be worth much more than the last deposited investment from the higher wage. What’s more the amount remaining after any pension payout is still earning more as the invested funds continue to grow, failing a serious market setback.

The “de facto contract” made with the employee upon hiring will continue to be paid out and never be reduced through the employee’s retirement. In the case of public school teachers, that contract is generally with the state government, which must therefore find a way to honor that “contract.” One way the state can do that is by increasing the contribution rate from the teachers and/or the schools. The teachers and/or the schools must eat the costs or more money will have to be provided by public sources, e.g. tax funds. The state has no way to control the invested funds as a financial source however. So the contribution from those invested funds can only be decreased, should the markets perform badly or for long, by raising the contributions from teachers and schools. Those contributions can also be raised by hiring more teachers as well, or raising salaries, but these moves shift the burden to the tax base and so are unwelcome.

So your pension’s value is composed of four parts: what you pay out of your check, what your employer pays above that amount, the interest that accrues on those investments, while you’re working, and the interest earned on what remains uncollected during retirement.

The last two fund contributors reside in a pension fund, a single financial account that is managed and invested by a state agency. For Minnesota teachers, except those in St. Paul who have their own fund, that fund is the Minnesota Teacher Retirement Association (TRA) fund, which is managed by the Minnesota State Board of Investments (SBI). Private investments on behalf of individuals also exist of course. Private investments involve an investment broker sometimes, and a fund manager for any mutual fund in which one invests. If one invests independently, say online, there will be a brokerage fee for every transaction. TRA and SBI management are government employees, not insurance company salespeople, fund managers or Wall Street brokers who take much bigger bites from invested dollars.

Public pension sources of revenue, 1987-2016
Compiled by NASRA based on U.S. Census Bureau data


So what’s the breakdown?

Well, it looked like this nationally in 2016, but since 2017 has been a very good year for investments, the 61% will be greater. It’s important to understand that these figures are amounts over 30 years and for the whole nation. Notice that on average, the employer (school districts) contribution is more than twice the employee (teachers/administrators) contribution. In Minnesota, those contribution rates are equal.

If one were excited by the competition for more money, one might look at that $4.3 trillion and salivate. Changing the plan from publicly managed to privately managed doesn’t change that dollar figure. It just breaks it into many smaller, more vulnerable pieces. As it is, changes to the plan are managed through public agencies, in Minnesota, that is the joint Legislative Commission on Pensions and Retirement (LCPR). That means it is subject to political influence, but not to the profit of account managers, a perilous trade-off perhaps.

Because it is an important part of the TRA legislative proposal, the ratio of employer and employee contribution rates is worth knowing about. Look at the comparison of the three big Minnesota public employee funds with the St. Paul

Employer and employee contribution rates

teachers’ fund compared to the U.S. average. Why they differ and what it means is certainly more complex than this chart describes. There are two things to consider as you look at this though. The blue column are from the deductions from your paycheck. When this column goes up and salaries are flat, or when retiree benefits (not in this chart) go down, jobs in education look unprofitable and the best qualified new teacher candidates may look elsewhere for jobs. This has an impact for every Minnesotan. Furthermore, for the red column to go up, the LCPR has to propose that change in a bill at the Legislature that must pass it into law over the governor’s signature or a two thirds majority. The cost of that change will come from the same source as teachers’ salaries, the tax base. I will leave you to deduce what this means in our current political climate with elections coming after the next session.

Some states, bearing very high employer contribution percentages, have been encouraged to convert or seriously constrain pensions, thus throwing the more of the cost of retirement onto the employees. Historically, Minnesota’s contribution ratios looked as follows.

Employee/Employer contribution rates 1960-2015

While such contribution equity seems fair, the burden of the contribution falls proportionally more heavily on the employee than on the tax base. Tax payers in Minnesota have been getting a good deal on their investment in the state’s teachers.


Wrapping up.

As of September 30, 2017, TRA had approximately $21.78 billion in assets. Of this amount, employee and employer contributions only account for less than one third of the funds’ values. Our (currently) healthy investment markets have been contributing more than twice that portion. The guiding wisdom of saving early and often is certainly born out here. In the 23 years from 1990 to 2013, a period that included two big and one small market setbacks, the TRA invested fund was able to well out perform national expectations.

Minnesota TRA pension fund sources 1990-2013

Discussions will be coming up this year on how Minnesota can stabilize the public employee pension obligations. You may wish to be part of that discussion, or at least make your informed opinion known. Beside this blog post, there is much more information online from state agencies and offices and the TRA. The Committee of Thirteen should also be able to help you understand how this might affect you and what we propose to help your situation. Visit www.committeeof13.org and send your questions to info@committeeof13.org.

Jay Ritterson, Committee of Thirteen

MN House Republicans Continue War on Teachers

Doing nothing to adjust the TRA fund now will compound the problems. The future costs will be much higher, and eventually, the People of Minnesota will be saddled with a whooping bill. The GOP seem to think that they are not responsible for fulfilling the terms of the State’s contract with its workers, especially those who teach our future generations of citizens. Perhaps they prefer to buy election support with tax breaks and refunds.
Here is the latest from Laurie Fiori Hacking, Executive Director, Minnesota Teachers Retirement Association keeping us informed from the Capitol:
“This evening the House voted 75 to 48 to approve SF 3, a scaled-down version of the pension bill that does not include TRA’s funding stability provisions but does include the funding stability measures for other systems (MSRS, PERA P&F and SPTRFA).  Most of the debate focused on the bill’s preemption and parental leave provisions, provisions which have caused the governor to declare he would veto the bill.
Rep. Mary Murphy (D-Hermantown) stated that the pension elements in the bill were not what had been passed in the regular legislative session nor by the Pension Commission.  Rep. Murphy characterized the process as “broken.”  House Minority Leader Melissa Hortman (D-Brooklyn Park) said there was no reason to tie the fate of pensions to the preemption issue. “

Senate passes doomed bill to House

The Senate just approved the pension bill (SF 3) with a vote of 34 to 30. Most of the debate on the bill centered on the controversial preemption language contained in the bill which the governor opposes. Sen. Scott Dibble (D-Minneapolis) offered an amendment to remove the contentious preemption language, but that amendment failed by a vote of 30 to 32.  SF 3, if it progresses, would next move to the House for consideration.

SF 3 does not contain the TRA funding stability provisions but it does include TRA’s administrative provisions. The stability provisions and funding for the other systems (MSRS, PERA P&F and SPTRFA) are included in the bill.  The bill also contains labor-related provisions such as ratifying parental leave in the various state labor contracts. It also contains the controversial local preemption provision that bars local governments from adopting local ordinances governing wages and benefits provided by private employers. The governor previously vetoed the preemption bill and last night issued a statement indicating he intends to veto the pension/preemption bill.  We will keep you posted if there is further action on this bill.

Courtesy of Laurie Fiori Hacking, Executive Director, Minnesota Teachers Retirement Association

Special Session Deadline Extended

The legislature continues to work, but progress is uncertain as of 8:30 this morning.

From Laurie Hacking, Exec. Dir. of TRA:

“The pension bill (SF 3) was finally posted late last night, however, it has not been voted on yet. It does NOT contain the TRA funding stability provisions but it does include TRA’s administrative provisions. The stability provisions and funding for the other systems (MSRS, PERA P&F and SPTRFA) are included in the bill.  The bill also contains labor-related provisions such as ratifying parental leave in the various state labor contracts, a measure that the governor supports. It also contains the controversial local preemption provision that bars local governments from adopting local ordinances governing wages and benefits provided by private employers. The governor previously vetoed the preemption bill and last night issued a statement indicating he intends to veto the pension/preemption bill (see below).  We will keep you posted as things unfold during the day.”

When all is said and done. Thank Governor Dayton and those legislators who have stood up for Minnesota’s state workers. They have been relentless in putting people before profits. That has been the great thing about Minnesota, and it must never be lost.

Here’s why funding is at issue

Late Sunday night the Senate unanimously approved the pension bill. Action today will move to the House. TRA’s financial stability measures were not initially included in the bill, but a floor amendment added back the TRA sections.  The TRA provisions, however, become effective only “if an appropriation is made to TRA in the 2017 legislative session for the employer contribution increase.”  It remains unclear whether in the final hours of the session legislative leaders and the governor will agree to provide the funding needed to cover the costs.  A summary of the TRA provisions in the Senate-passed bill are described below.  Note that none of these provisions are effective unless funding is provided in the 2017 session.

  • COLA: Reduces TRA’s 2% COLA to 1% for five years, effective 2018-2022; for the next five years (2023-2027), the COLA increases 0.1% per year until reaching 1.5% in 2027.  Eliminates future COLA triggers that would increase COLAs if system funding improved. Also requires LCPR to study COLAs for all plans and make recommendations for the 2021 legislative session.
  • COLA Delay: Delays payment of the first full COLA until a member reaches normal retirement age (age 66 for post-89 hires and age 65 for pre-89 hires). Implementation of the normal retirement age COLA is delayed five years, until January 1, 2023.  Under this proposal a teacher retiring at age 62 would have a frozen benefit for four years until eligible for a full COLA, whereas under current law the wait period for the full COLA is 18 months. Members retiring at age 62+ with 30 years of service or retiring under the Rule of 90 are exempt from this COLA delay. Also exempt are disabilitants and younger survivors of members who die while active.
  • Early retirement benefits: Reduce early retirement benefits by eliminating current-law augmentation rates that are used in calculating benefits.  Early retirement benefit augmentation would be eliminated over a five-year period beginning July 1, 2018 through June 30, 2023.  Members who retire at age 62+ with 30 years of service would retain the more favorable early retirement benefit provisions available to them under current law.  For members not eligible for 62/30 provisions, the proposed change once fully implemented would reduce early retirement benefits by approximately 18% for members retiring at age 60, by 11% for members retiring at age 62 (TRA’s average retirement age), by 8% for members retiring at age 63 and by 6% for members retiring at age 64.  Reductions for members retiring before age 60 would be more significant, ranging from 19% at age 59 to 33% at age 55.
  • Contribution rates: Increases employEE contribution rates from 7.5% to 7.75%, beginning July 1, 2022.  Increases employER rates from 7.5% to 8.75% phased in over six years, 2017-2023). 
  • Deferred augmentation: Reduce augmentation from 2% to 0% for vested deferred members who terminate employment and elect to leave their contributions with TRA.  The elimination of augmentation would occur for future years of deferral beginning July 1, 2018.
  • Refund interest rate: Lowers interest rate paid on refunds from 4% to 3%.
  • Investment return assumption: Lowers TRA’s investment return assumption to 7.5% along with all other pension plans.  Also lowers to 7.5% the interest TRA charges members and employers for repayment of refunds, various leave payments, and omitted contributions.
  • Amortization period: Extends TRA’s amortization period by 10 years from 2037 to 2047.  Most other plans’ amortization periods are also extended to 2047.

Courtesy of MN TRA

A pro-rich, anti-government services bill

The House State Government Finance Committee approved the omnibus pension bill (HF 565) by a voice vote this morning and referred the bill to the House Ways and Means Committee.  Rep. O’Driscoll said the bill would likely be held in Ways and Means until global budget targets are agreed to.  Before approving the bill, the Committee approved an amendment to take TRA out of the pension bill as well as remove $5 million in annual state aid for the St. Paul Teachers Retirement Fund Association and $4.5 million in annual state aid for the PERA Police and Fire.  O’Driscoll said the state aid was being removed because it violates the House’s current budget targets.

Julie Bleyhl, AFSCME Legislative Director, testified on behalf of the 20 organizations that make up the Public Employee Pension Coalition and indicated that the group supports a pension package with funding.

TRA’s Executive Director Laurie Hacking testified and emphasized the need to have a pension bill this year to address financial problems.  She stated that while the bill met the TRA board’s goal of financial stability, the bill did not meet the other goals of maintaining the recruitment/retention value of pensions and shared commitment.  Hacking pointed out that under the proposed bill, members (active and retirees) would bear 87 percent of the cost of the reforms (66 percent by actives and 21 percent by retirees).

Jodee Buhr, representing Education Minnesota stated that the organization supports the TRA proposal and supports being part of the bill.  She indicated that Education Minnesota continues to be at the table with other stakeholder groups to worked toward an equitable solution.

Courtesy of TRA Communications