State employee and teacher pensions have taken a major hit during the recession. The State Board of Investment says legislative intervention is needed to stabilize the accounts.
Sponsored by Rep. Mary Murphy (DFL-Hermantown), HF3281 and HF2952 set out adjustments to a myriad of retirement accounts including the Minnesota State Retirement System plan that covers more than 50,000 active employees, and currently pays monthly benefits to over 20,000 retirees, survivors and disabled employees.
Other plans include: General Employee Retirement Plan for the Public Employees Retirement Association, Teachers Retirement Association, Duluth Teacher’s Retirement Fund Association, St. Paul Teacher’s Retirement Fund Association, Minneapolis Employees Retirement Fund and the State Patrol Plan.
The bills would adjust the inflow and outflow of money by using various strategies including reducing cost of living adjustments, reducing interest on deferred benefits and eliminating interest on re-employed retiree accounts.
The bills were approved April 8 by the House State Government Finance Division and sent to the House Finance Committee.
Murphy, vice chairwoman of the Legislative Commission on Pensions and Retirement, said the changes are a result of a consolidation of about 24 separate pension bills.
Everyone shares in the fix
Mary Vanek, executive director of the Public Employees Retirement Association, said the Legislature directs the plans to be 100 percent funded; however, most plans can operate comfortably at 90 to 95 percent. The bills lay out a path for the plans to achieve the funding targets.
Luther Thompson, assistant executive director for legal and legislative services for the Teachers Retirement Association said, “You have to look at public pensions as one of the positive things you’ve done for the state of Minnesota. They have been prefunded, they are not broke, but they have to be fixed.”
While TRA is slowly seeing market increases, it is not enough to recover from its 59.8 percent funding level as of June 30, 2009. “It is absolutely an actuarial necessity to fix the fund now. There is no reasonable economic expectation that we can earn our way out of this,” Thompson said.
Like many funds, TRA is looking to get all investors to share in the sacrifice. Under the bills, TRA member and employer contribution rates would increase 0.5 percent annually, phased in over a four-year period. Annual benefit adjustments would be suspended for 2011 and 2012, and the yearly increase would be lowered from 2.5 percent to 2 percent thereafter. The change would remain in place until the fund is 90 percent funded.
Jan Alswager, chief lobbyist for Education Minnesota, said the organization opposes the changes because it puts a heavier burden on active members. “We’re asking the active members to pay a 2 percent increased contribution for a problem they had very little to do with,” she said.
Some MSRS investors could see a slightly different approach.
Executive Director Dave Bergstrom said the board isn’t looking at increasing contribution rates to solve the problem.”We felt very strongly that employees can’t handle any higher contribution rates because they are getting zero percent raises, have been getting zero percent and likely not getting much into the future.”
Instead, MSRS would reduce post-retirement adjustments from 2.5 percent to 2 percent, to be restored once the fund is 90 percent funded. Re-employed retiree account interest would be eliminated and new members would be vested after five years, instead of the current three years.
The State Patrol Plan and MERF would have the biggest impact on state agency budgets. Previously, about $36.5 million annually was dedicated for MERF relief, but blank appropriations were amended to the bill in the government finance division.
Defined benefit vs. defined contribution
Rep. Steve Gottwalt (R-St. Cloud) asked why state plans don’t consider moving toward a defined contribution approach, where an employer sets aside a fixed amount per year for the benefit of an employee. Many private sector businesses use this option, he noted.
Vanek said the plans firmly believe a defined benefit plan, which relies on a formula using salary history and years of employment to determine an individual’s benefits, is a better approach for public employees. Studies show that if you target a certain benefit level, a defined benefit plan can achieve that benefit level at 46 percent of the cost of a defined contribution plan, she said. “Benefit plans, if managed properly, can get better bang for your buck.”
Rep. Mary Kiffmeyer (R-Big Lake) said there were many years where previous retirees received double digit increases to the extent that it doubled their pensions. Pension directors told the Legislature that the increases “were too rich,” yet lawmakers ignored their advice, she said.
“You are absolutely right, we took too long to put the caps on,” Murphy said. The pension commission feels very strongly that the Legislature must act now, she added. “We can’t wait another year to talk about it.”